Should I file first or wait to get sued and defend or respond? Aside from the legal merits of claims or defenses, there are procedural advantages to the first-filed rule and that rule is that federal courts in different jurisdictions may, but not always, defer to the first-filed case in parallel cases as a matter of courtesy and convenience. Abstention doctrines come into play when there are parallel state and federal cases. There is no certainty about the application of the rule as one court may decide to keep a case despite the first-filed rule and another may not be persuaded to transfer it on grounds of alleged inconvenience. This increases the risk of inter-jurisdictional conflicts.
One would think that filing first would be a wise strategy at least when you know that your client will get sued or where you want the benefit of a presumptive more convenient or favorable forum. You may still end up defending in two jurisdictions if both courts refuse to transfer their respective actions, but at least you have one forum of your choice.
This is what the supplier must have thought in Ace Hardware Int’l Holdings Inc. v. Masso Expo Corp., 2012 WL 182236 (N.D. Ill. Jan. 23, 2012) when it sued the Puerto Rico distributor for declaratory judgment in federal court in Illinois. Instead of counterclaiming in the Illinois action, Masso, the distributor, responded with a Law 75 action against Ace in federal court in Puerto Rico. 2011 WL 5525381 (D.P.R. Nov. 14, 2011). The case in Illinois was filed first and months before the Puerto Rico action. Still, the federal court in Puerto Rico (Gelpí, J. adopting Vélez Rivé’s recommendations) denied a motion to transfer the parallel action to Illinois.
For its part, the federal court in Illinois was not moved to reconsider its ruling refusing to transfer the parallel action to Puerto Rico. First, it held that, the fact that Puerto Rico law applies is not sufficient to transfer and there is no choice of law provision mandating litigation in Puerto Rico or for that matter, in Illinois. Second, the court disagreed with the Puerto Rico Magistrate Judge’s dictum that Law 75 prohibited litigation of Law 75 claims outside of Puerto Rico courts and distinguished the permissive forum selection clause at issue in the agreements that would not offend Section 278(b) as opposed to mandatory forum-selection clauses that arguably would, but cites to numerous authorities enforcing mandatory forum-selection clauses in Law 75 disputes. While the Illinois court was careful not to cast blame on the Puerto Rico court for refusing to transfer, reading between the lines and citing a case transferring a Puerto Rico case to Texas based on the first-filed rule and Section 1404(a), the court found a way to disagree and keep the action in Illinois. Finally, the court also disagreed with the distributor’s pleas of inconvenience retorting that it was of its own making for having filed the Puerto Rico action instead of filing counterclaims in the Illinois action.
Monday, April 15, 2013
Thursday, February 21, 2013
Law 21 claim in the face of an expressly non-exclusive agreement does not survive partial summary judgment, but Court acknowledges important textual interpretation of standing to sue under Law 21
In a previous blog (Jan. 14, 2013), I reported that the question remains unanswered whether a sales representative in Puerto Rico- who represents exclusively the supplier’s products but no competing lines and does so without a written agreement (or is silent on exclusivity)-states a claim under Law 21.
Most courts, and Gonzalez v. Hurley International LLC, 2013 WL 371766 (D.P.R. Jan. 31, 2013)(SEC), is no exception, endorse the view that the exclusivity contemplated by Law 21 means either a restriction on the supplier’s right to appoint a competitor or the grant of an intra-brand monopoly to the sales representative. It is fairly predictable that, as in Hurley, most Law 21 cases fail to state an actionable claim when the de facto exclusive representative (like a “sole” distributor, meaning there is no one else but him or her representing the line in the territory) does business with an expressly non-exclusive written agreement. There should be no ambiguity there and that explains why the claim fails. Still, the question of statutory interpretation lingers whether one of the formulations of exclusivity that textually is possible under Law 21 is something different; that is, the representative has assumed the obligation not to represent competing lines, so that the character of his representation is “exclusive” for his principal. His or her attention is dedicated exclusively to the principal.
In a thoughtful opinion, Hurley addresses that question, although it concedes that it is not necessary for its holding. Hurley involved a motion for summary judgment to dismiss plaintiff’s claim brought under Law 21. Plaintiff, a representative of surfing wear clothing and equipment, filed suit alleging an unjustified termination of a sales representative agreement. Plaintiff alleged that Hurley’s founder had verbally appointed her as the exclusive representative and required her not to compete by offering similar products. Plaintiff was not the sole representative as Hurley offered its products for sale in Puerto Rico through other channels, including licensees and national accounts, such as Costco. Much to plaintiff’s chagrin, she signed an expressly non-exclusive agreement which expired, but the parties continued doing business under the same terms and conditions until the unilateral termination of the business relationship.
The thrust of the decision granting partial summary judgment for Hurley is that where, as here, the terms of the contract are clear and unambiguous, those terms must be enforced under the Civil Code so that plaintiff is clearly a non-exclusive representative and has no actionable claim under Law 21 for at least claims arising during the duration of the agreement. It does not matter that, verbally or from a course of dealings, plaintiff may have been the sole representative or was bound by a verbal agreement not to compete.
Plaintiff then argued that the court should disregard the non-exclusive terms of the agreement and accept the business reality that the “arrangements of the parties” evidenced exclusivity. For this proposition, plaintiff argued that Law 21 is of public order and the rights cannot be waived. The Court correctly noted that the anti-waiver provision in Law 21 was meant to prevent situations where the principal purposefully conceals aspects of the business relationship to avoid liability under Law 75, citing Advance Exp., Inc. v. Medline Indus., No. 06–1527, 2007 WL 853745, at *2 (D.P.R. Mar.19, 2007), not to excuse the parties from clear and unambiguous contracts they have willingly subscribed. As the Court carefully noted, “[s]he cannot now use Law 21’s liberal undertone as a sword with which to cut down what she voluntarily agreed to in the first place.” So, the waiver argument fails. The written agreement overrides the verbal allegations of exclusivity. Accordingly, the Court dismissed the Law 21 claim stemming from 2007-2009 for the duration of the agreement.
With respect to claims arising before entering into the agreement, the court also granted summary judgment reasoning that the claims were time barred. As to the six-month gap where the parties continued to do business after expiration of the agreement, Hurley failed to prove extinctive novation and the Law 21 claim for that period survived termination. There was a triable jury issue on whether the parties’ modus operandi evinced exclusivity.
The Court went further. In dicta, the Court delved into the unanswered question of statutory interpretation and acknowledged the textual meaning of Law 21: “Whether an agent is the sole sales representative within a defined territory, and whether her sole business is to represent the principal’s products or services (like González), then, should be of some consequence to the exclusivity determination. At the outset, this interpretation (the “Traditional Interpretation”) comports with the ordinary meaning (or at the very least one meaning) of the word exclusive. See, e.g., City of Vicksburg v. Vicksburg Waterworks Co., 202 U.S. 457, 471 (1906) (finding that exclusive means ‘[a]ppertaining to the subject alone; not including, admitting, or pertaining to any other or others; undivided; sole: as, an exclusive right or privilege ...” (citation and internal quotation marks omitted; emphasis added); Webster’s Ninth New Collegiate Dictionary 433 (1986) (defining exclusive as “limiting or limited to possession, control, or use by a single individual or group” or as “single, sole”). The Traditional Interpretation is also in accord with the Civil Code’s provision that “[t]he words of a law shall generally be understood in their most usual signification, taking into consideration, not so much the exact grammatical rules governing the same, as their general and popular use.”
Further, as I had observed in my Blog, the Court noted: “Cruz–Marcano seems to have left unanswered the question whether exclusivity is simply a limitation on the principal’s right to compete (the mercantile law definition), or whether it can also encompass the Traditional Interpretation: a non-compete obligation by a sole sales representatives whose business is solely to represent the principal’s products. Sales representatives like González would greatly benefit from this latter interpretation, which may further the objective behind Law 21 of placing the sales representatives on equal footing with the distributors currently protected by Law 75.”
In the end, the Court held that plaintiff “has completely ignored this important argument” and was waived. Having ruled that plaintiff’s Law 21 claim partially survived summary judgment, the Court then held that Hurley’s just cause defense was a factual issue for the jury.
Most courts, and Gonzalez v. Hurley International LLC, 2013 WL 371766 (D.P.R. Jan. 31, 2013)(SEC), is no exception, endorse the view that the exclusivity contemplated by Law 21 means either a restriction on the supplier’s right to appoint a competitor or the grant of an intra-brand monopoly to the sales representative. It is fairly predictable that, as in Hurley, most Law 21 cases fail to state an actionable claim when the de facto exclusive representative (like a “sole” distributor, meaning there is no one else but him or her representing the line in the territory) does business with an expressly non-exclusive written agreement. There should be no ambiguity there and that explains why the claim fails. Still, the question of statutory interpretation lingers whether one of the formulations of exclusivity that textually is possible under Law 21 is something different; that is, the representative has assumed the obligation not to represent competing lines, so that the character of his representation is “exclusive” for his principal. His or her attention is dedicated exclusively to the principal.
In a thoughtful opinion, Hurley addresses that question, although it concedes that it is not necessary for its holding. Hurley involved a motion for summary judgment to dismiss plaintiff’s claim brought under Law 21. Plaintiff, a representative of surfing wear clothing and equipment, filed suit alleging an unjustified termination of a sales representative agreement. Plaintiff alleged that Hurley’s founder had verbally appointed her as the exclusive representative and required her not to compete by offering similar products. Plaintiff was not the sole representative as Hurley offered its products for sale in Puerto Rico through other channels, including licensees and national accounts, such as Costco. Much to plaintiff’s chagrin, she signed an expressly non-exclusive agreement which expired, but the parties continued doing business under the same terms and conditions until the unilateral termination of the business relationship.
The thrust of the decision granting partial summary judgment for Hurley is that where, as here, the terms of the contract are clear and unambiguous, those terms must be enforced under the Civil Code so that plaintiff is clearly a non-exclusive representative and has no actionable claim under Law 21 for at least claims arising during the duration of the agreement. It does not matter that, verbally or from a course of dealings, plaintiff may have been the sole representative or was bound by a verbal agreement not to compete.
Plaintiff then argued that the court should disregard the non-exclusive terms of the agreement and accept the business reality that the “arrangements of the parties” evidenced exclusivity. For this proposition, plaintiff argued that Law 21 is of public order and the rights cannot be waived. The Court correctly noted that the anti-waiver provision in Law 21 was meant to prevent situations where the principal purposefully conceals aspects of the business relationship to avoid liability under Law 75, citing Advance Exp., Inc. v. Medline Indus., No. 06–1527, 2007 WL 853745, at *2 (D.P.R. Mar.19, 2007), not to excuse the parties from clear and unambiguous contracts they have willingly subscribed. As the Court carefully noted, “[s]he cannot now use Law 21’s liberal undertone as a sword with which to cut down what she voluntarily agreed to in the first place.” So, the waiver argument fails. The written agreement overrides the verbal allegations of exclusivity. Accordingly, the Court dismissed the Law 21 claim stemming from 2007-2009 for the duration of the agreement.
With respect to claims arising before entering into the agreement, the court also granted summary judgment reasoning that the claims were time barred. As to the six-month gap where the parties continued to do business after expiration of the agreement, Hurley failed to prove extinctive novation and the Law 21 claim for that period survived termination. There was a triable jury issue on whether the parties’ modus operandi evinced exclusivity.
The Court went further. In dicta, the Court delved into the unanswered question of statutory interpretation and acknowledged the textual meaning of Law 21: “Whether an agent is the sole sales representative within a defined territory, and whether her sole business is to represent the principal’s products or services (like González), then, should be of some consequence to the exclusivity determination. At the outset, this interpretation (the “Traditional Interpretation”) comports with the ordinary meaning (or at the very least one meaning) of the word exclusive. See, e.g., City of Vicksburg v. Vicksburg Waterworks Co., 202 U.S. 457, 471 (1906) (finding that exclusive means ‘[a]ppertaining to the subject alone; not including, admitting, or pertaining to any other or others; undivided; sole: as, an exclusive right or privilege ...” (citation and internal quotation marks omitted; emphasis added); Webster’s Ninth New Collegiate Dictionary 433 (1986) (defining exclusive as “limiting or limited to possession, control, or use by a single individual or group” or as “single, sole”). The Traditional Interpretation is also in accord with the Civil Code’s provision that “[t]he words of a law shall generally be understood in their most usual signification, taking into consideration, not so much the exact grammatical rules governing the same, as their general and popular use.”
Further, as I had observed in my Blog, the Court noted: “Cruz–Marcano seems to have left unanswered the question whether exclusivity is simply a limitation on the principal’s right to compete (the mercantile law definition), or whether it can also encompass the Traditional Interpretation: a non-compete obligation by a sole sales representatives whose business is solely to represent the principal’s products. Sales representatives like González would greatly benefit from this latter interpretation, which may further the objective behind Law 21 of placing the sales representatives on equal footing with the distributors currently protected by Law 75.”
In the end, the Court held that plaintiff “has completely ignored this important argument” and was waived. Having ruled that plaintiff’s Law 21 claim partially survived summary judgment, the Court then held that Hurley’s just cause defense was a factual issue for the jury.
Wednesday, February 20, 2013
The question of exclusivity in a declaratory judgment action under Law 75 is for the jury
The exclusivity imbroglio continues. In Medina & Medina v. Hormel Corporation, No. 09-1098 (JAG)(D.P.R. Feb. 20, 2013), Plaintiff, a distributor of meat products, filed an action for breach of contract, damages, and declaratory judgment under Law 75. After motion practice, the Court found that summary judgment was inappropriate on the issue whether an exclusive distributorship existed and ordered a jury trial as demanded in the Complaint. The parties agreed to bifurcate liability and damages to try first the issue of liability. During the pretrial conference, defendant Hormel objected to having juries decide the ultimate question whether there was an exclusive agreement arguing that it is an issue of law for the Court. The Court, however, holds that an action for declaratory relief is both legal and equitable and the constitutional right to a jury trial requires the jury to decide the exclusivity question. Mind you, under Puerto Rico law, exclusivity is apparent from the agreement of the parties or the course of dealings. Stating the Court’s Opinion differently, the distributor’s claim for impairment of an alleged exclusive contract under Law 75 requires the jury to decide if the facts demonstrate the existence of a meeting of the minds to appoint Medina as the exclusive distributor, and if so, the scope of the exclusivity. In other words, was there a breach of contract? Bifurcation of the case and the declaratory judgment action do not override the right to a jury trial on this question.
Monday, January 14, 2013
What does exclusivity mean in Law 21? The question should be revisited.
Dear readers, I’d like to start the New Year with a provocative thought.
There is a substantial body of case law holding that a sales representative cannot have an actionable Law 21 claim without an exclusive contract with a manufacturer or grantor. See, e.g., Cruz Marcano v. Sanchez Tarazona, 172 D.P.R. 526 (2007)(adopting a commercial definition of exclusivity). Plain text of Law 21 defines a sales representative as “an independent entrepreneur who with a character of exclusivity establishes a sales representative contract with a principal or grantor…” 10 Laws of P.R. Annot. §279 (a)(translation ours).
One has to wonder- from a public policy standpoint- the legislative wisdom behind the exclusivity requirement in Law 21. After all, Law 21 is patterned after Law 75 and Law 75 does not require exclusivity for an actionable claim brought by a non-exclusive dealer. Further, Law 21 was enacted precisely to provide a remedy to those commercial agents left unprotected by Law 75, Roberco v. Oxford, 88 J.T.S. 102 (1988). It seems counterintuitive that a remedial statute enacted to fill gaps in another special law would leave the beneficiaries, i.e., non-exclusive sales representatives, without a remedy for unjustified actions by their grantors when their dealer counterparts have legal protection. See Statement of Motives, P. of S. 793, December 5, 1990.
Legislative wisdom aside, the plain text of Law 21 requires exclusivity and courts cannot overlook the statute as written, but the question arises what does exclusivity mean? Without statutory or contractual definitions, the word exclusive, by itself, may turn out to be vague or ambiguous, especially in this new age of sales through the internet, the expansion of club stores and the presence of national accounts doing business without borders. Courts have defined exclusivity as limiting the supplier’s right to sell directly or appoint another competing distributor in the territory. Exclusivity can be airtight to prohibit all intra-brand competition or limited in scope by products, clientele, or territory. These are commercial definitions of exclusivity that have been developed from a course of dealings, precedent, commercial contracts, and treatises.
What the cases have left unanswered, however, as the issue may not have been raised, is whether exclusivity is simply a limitation on the supplier’s right to compete or can it be something else. What else could it be? Start with plain text (and the Spanish language controls). The qualifier of exclusivity in §279 (a) appears before not after the definition of the object of the “sales representative agreement” which is the grant of a specific territory or market within Puerto Rico. The statute does not say an “exclusive contract with a principal or grantor”, but rather, defines the sales representative as an “independent entrepreneur quién con carácter de exclusividad (who with a character of exclusivity) establishes a sales representative contract with a principal or grantor…”. Moreover, “sales representative contract” is a defined term in §279(c) and nowhere does that definition mention exclusivity as an element of a claim. Does the order or sequence of the exclusivity qualifier in the plain statutory text make a difference? Certainly, an argument can be made that it does. Had the Legislature intended to define exclusivity as a restriction or self-limitation on the supplier’s grant it would have chosen to add exclusivity after but not before the reference to the sales representative contract.
Then, what does it mean the “character of exclusivity” of the “independent entrepreneur”? In this context, the ordinary meaning of exclusivity is subject to several connotations: “limiting or limited to possession, control, or use by a single group or individual”, “excluding others from participation.” See Merriam-Webster’s on line dictionary. An authoritative Spanish Dictionary, cited in Cruz Marcano, supra, defines exclusivity as “the privilege or right by which a person or entity can do something prohibited to others.” These definitions support the commercial meaning of exclusivity endorsed by the courts. El Diccionario de la Real Academia Espanola (8th ed.) also provides an ordinary meaning definition not mentioned by the Cruz Marcano court which is “único, solo, excluyendo a cualquier otro.” Webster’s alternative definition is similar: “whole, undivided” as in exclusive attention paid by him or her.
Should the text follow a commercial definition, as precedent requires, or should the text be construed by its ordinary meaning, especially when ordinary meaning also has a valid and established commercial use, as in a non-compete obligation by the agent? It is certainly arguable that the character of exclusivity means the “whole, undivided” attention paid by the independent entrepreneur to the supplier’s products to the exclusion of competing products which is akin to a non-compete obligation. A sales representative may have an obligation either not to compete with similar products of the supplier (the “exclusive” character of the agent’s business) or he or she may represent solely the supplier’s products not because it has agreed not to compete but because that is the character of his or her business. Cruz Marcano left the door open for this alternative reasoning because it defines one element of Law 21 as requiring evidence that the agent has “promot[ed] and transact[ed] in an exclusive manner contracts on behalf of a principal...” (translation ours).
Following an ordinary meaning of the word exclusive and assuming the absence of an expressly non-exclusive contract, the “exclusive” entrepreneur (dedicated to serve solely the grantor’s products) that has developed or expanded the market and clientele for the principal's products or services could have an actionable Law 21 termination claim even though the supplier or grantor never granted exclusivity to preclude intra-brand competition. As precedent now stands, these "exclusive" sales representatives, but "non-exclusive" in the commercial sense of the word, would have no relief under Law 21 for an unjustified termination of the relationship.
If it were proper to look at legislative history in this context, it is either inconclusive or suggestive of intent not to exclude agents from protection. There is no discussion about the scope of exclusivity other than to indicate the types of agents that previously had no protection and would have protection now, including representatives of pharmaceutical products (“representantes de fabrica”). There was some discussion not to limit the scope to mercantile transactions but to encompass civil contracts as well. The definition of sales representative underwent modifications as the bill passed through the House and the Senate. Initially, the statute defined the “exclusivity character or not”, see P. of S. 793, May 3, 1990, and the word “no” was deleted from the final bill. While this clearly suggests that a non-exclusive agent would not be protected as supported by plain text, legislative history seems inconclusive on the meaning and scope of exclusivity.
To be sure, non-exclusive sales representatives are left out in the cold unless the Legislature amends Law 21. But a class of agents whose business is solely to represent the principal's products or services, have a leg to stand on, if courts open the envelope and reconsider what exclusivity means.
There is a substantial body of case law holding that a sales representative cannot have an actionable Law 21 claim without an exclusive contract with a manufacturer or grantor. See, e.g., Cruz Marcano v. Sanchez Tarazona, 172 D.P.R. 526 (2007)(adopting a commercial definition of exclusivity). Plain text of Law 21 defines a sales representative as “an independent entrepreneur who with a character of exclusivity establishes a sales representative contract with a principal or grantor…” 10 Laws of P.R. Annot. §279 (a)(translation ours).
One has to wonder- from a public policy standpoint- the legislative wisdom behind the exclusivity requirement in Law 21. After all, Law 21 is patterned after Law 75 and Law 75 does not require exclusivity for an actionable claim brought by a non-exclusive dealer. Further, Law 21 was enacted precisely to provide a remedy to those commercial agents left unprotected by Law 75, Roberco v. Oxford, 88 J.T.S. 102 (1988). It seems counterintuitive that a remedial statute enacted to fill gaps in another special law would leave the beneficiaries, i.e., non-exclusive sales representatives, without a remedy for unjustified actions by their grantors when their dealer counterparts have legal protection. See Statement of Motives, P. of S. 793, December 5, 1990.
Legislative wisdom aside, the plain text of Law 21 requires exclusivity and courts cannot overlook the statute as written, but the question arises what does exclusivity mean? Without statutory or contractual definitions, the word exclusive, by itself, may turn out to be vague or ambiguous, especially in this new age of sales through the internet, the expansion of club stores and the presence of national accounts doing business without borders. Courts have defined exclusivity as limiting the supplier’s right to sell directly or appoint another competing distributor in the territory. Exclusivity can be airtight to prohibit all intra-brand competition or limited in scope by products, clientele, or territory. These are commercial definitions of exclusivity that have been developed from a course of dealings, precedent, commercial contracts, and treatises.
What the cases have left unanswered, however, as the issue may not have been raised, is whether exclusivity is simply a limitation on the supplier’s right to compete or can it be something else. What else could it be? Start with plain text (and the Spanish language controls). The qualifier of exclusivity in §279 (a) appears before not after the definition of the object of the “sales representative agreement” which is the grant of a specific territory or market within Puerto Rico. The statute does not say an “exclusive contract with a principal or grantor”, but rather, defines the sales representative as an “independent entrepreneur quién con carácter de exclusividad (who with a character of exclusivity) establishes a sales representative contract with a principal or grantor…”. Moreover, “sales representative contract” is a defined term in §279(c) and nowhere does that definition mention exclusivity as an element of a claim. Does the order or sequence of the exclusivity qualifier in the plain statutory text make a difference? Certainly, an argument can be made that it does. Had the Legislature intended to define exclusivity as a restriction or self-limitation on the supplier’s grant it would have chosen to add exclusivity after but not before the reference to the sales representative contract.
Then, what does it mean the “character of exclusivity” of the “independent entrepreneur”? In this context, the ordinary meaning of exclusivity is subject to several connotations: “limiting or limited to possession, control, or use by a single group or individual”, “excluding others from participation.” See Merriam-Webster’s on line dictionary. An authoritative Spanish Dictionary, cited in Cruz Marcano, supra, defines exclusivity as “the privilege or right by which a person or entity can do something prohibited to others.” These definitions support the commercial meaning of exclusivity endorsed by the courts. El Diccionario de la Real Academia Espanola (8th ed.) also provides an ordinary meaning definition not mentioned by the Cruz Marcano court which is “único, solo, excluyendo a cualquier otro.” Webster’s alternative definition is similar: “whole, undivided” as in exclusive attention paid by him or her.
Should the text follow a commercial definition, as precedent requires, or should the text be construed by its ordinary meaning, especially when ordinary meaning also has a valid and established commercial use, as in a non-compete obligation by the agent? It is certainly arguable that the character of exclusivity means the “whole, undivided” attention paid by the independent entrepreneur to the supplier’s products to the exclusion of competing products which is akin to a non-compete obligation. A sales representative may have an obligation either not to compete with similar products of the supplier (the “exclusive” character of the agent’s business) or he or she may represent solely the supplier’s products not because it has agreed not to compete but because that is the character of his or her business. Cruz Marcano left the door open for this alternative reasoning because it defines one element of Law 21 as requiring evidence that the agent has “promot[ed] and transact[ed] in an exclusive manner contracts on behalf of a principal...” (translation ours).
Following an ordinary meaning of the word exclusive and assuming the absence of an expressly non-exclusive contract, the “exclusive” entrepreneur (dedicated to serve solely the grantor’s products) that has developed or expanded the market and clientele for the principal's products or services could have an actionable Law 21 termination claim even though the supplier or grantor never granted exclusivity to preclude intra-brand competition. As precedent now stands, these "exclusive" sales representatives, but "non-exclusive" in the commercial sense of the word, would have no relief under Law 21 for an unjustified termination of the relationship.
If it were proper to look at legislative history in this context, it is either inconclusive or suggestive of intent not to exclude agents from protection. There is no discussion about the scope of exclusivity other than to indicate the types of agents that previously had no protection and would have protection now, including representatives of pharmaceutical products (“representantes de fabrica”). There was some discussion not to limit the scope to mercantile transactions but to encompass civil contracts as well. The definition of sales representative underwent modifications as the bill passed through the House and the Senate. Initially, the statute defined the “exclusivity character or not”, see P. of S. 793, May 3, 1990, and the word “no” was deleted from the final bill. While this clearly suggests that a non-exclusive agent would not be protected as supported by plain text, legislative history seems inconclusive on the meaning and scope of exclusivity.
To be sure, non-exclusive sales representatives are left out in the cold unless the Legislature amends Law 21. But a class of agents whose business is solely to represent the principal's products or services, have a leg to stand on, if courts open the envelope and reconsider what exclusivity means.
Monday, November 19, 2012
After proving just cause, supplier wins on summary judgment to dismiss Law 75 federal action
In one of the most noteworthy Law 75 cases for suppliers since the Medina and Nike decisions of the 1980’s, the federal district court in Casco Sales v. Maruyama, No. 10-1145 (SEC)(D.P.R. Nov. 2, 2012), granted the supplier’s MSJ finding just cause for termination of an exclusive distribution agreement for the sale of landscape equipment.
The case is significant for respecting liberty of contract and sweeping aside multiple factors that in the past have been obstacles precluding summary judgment in Law 75 cases, such as: the materiality of essential contractual obligations, acceptance of late payments vs. acquiescence or tacit consent, the dealer’s knowledge of the grounds or basis of the termination and the sufficiency of the termination letter, cumulative effect of arguably non-essential breaches and the meaning of the statutory just cause prong of substantial and adverse effect to the principal’s interests, and whether looking for another distributor is sufficient to prove a pretext for the termination.
Endorsing the clear terms of the contract subscribed by the parties, the court found just cause for termination based on: 1) the dealer’s consistent breach of the payment terms; 2) the dealer's failure to provide inventory and sales reports as required by the agreement; 3) refusal to participate in the supplier’s “booking program”, and 4) the dealer’s failure to hire and train sales personnel to market the principal’s products and to maintain an adequate sales force.
Late payments. The court distinguished First Circuit precedent holding that summary judgment is inappropriate in “abnormal circumstances” where the supplier “does not care” about late payments. The court found that the contractual terms were essential obligations and the principal had not waived the payment terms or acquiesced to accepting late payments. According to the Court, accepting late payments is different from acquiescing or tacitly consenting to them. Failure to pay on time affected the principal’s ability to sell equipment and led to credit holds which satisfied the “independent ground” for just cause in Section 278. In sum, accepting late payments did not operate to novate the payment terms in the agreement. Nor does providing a payment plan proscribe the principal from terminating the agreement in the future. It certainly did not help the dealer that, at the time of termination, it owed the principal $57k in unpaid invoices.
Notice of termination. The Court rejected an argument that Law 75 or the agreement required a “warning” or “threat” that the dealer’s contractual non-compliance would be a ground for termination. Although the termination letter “could have been better drafted” to provide “a succinct explanation” of the breaches of the agreement, there is no requirement in Law 75 that the supplier send the dealer written notice detailing every possible basis for termination. The only requirement is the existence of just cause and the agreement provided notice of the grounds for termination. The court held that the “cumulative weight” of the dealer’s “other contractual breaches” even if deemed non-essential (besides failing to pay on time that breached an essential obligation), was detrimental to the parties’ relationship and adversely and substantially affected the principal’s interests (and proved just cause).
Pretext. The Court rejected the dealer’s argument that the termination was a pretext to switch distributors. The Court found nothing wrong that the principal, to avoid a serious disruption in sales, had been looking for other distributors at the time of termination. “Prohibiting such a sensible approach...would deal a severe blow to our free enterprise system.”
Note: Before discovery and the filing of the MSJ, the Author served as the mediator in the case.
The case is significant for respecting liberty of contract and sweeping aside multiple factors that in the past have been obstacles precluding summary judgment in Law 75 cases, such as: the materiality of essential contractual obligations, acceptance of late payments vs. acquiescence or tacit consent, the dealer’s knowledge of the grounds or basis of the termination and the sufficiency of the termination letter, cumulative effect of arguably non-essential breaches and the meaning of the statutory just cause prong of substantial and adverse effect to the principal’s interests, and whether looking for another distributor is sufficient to prove a pretext for the termination.
Endorsing the clear terms of the contract subscribed by the parties, the court found just cause for termination based on: 1) the dealer’s consistent breach of the payment terms; 2) the dealer's failure to provide inventory and sales reports as required by the agreement; 3) refusal to participate in the supplier’s “booking program”, and 4) the dealer’s failure to hire and train sales personnel to market the principal’s products and to maintain an adequate sales force.
Late payments. The court distinguished First Circuit precedent holding that summary judgment is inappropriate in “abnormal circumstances” where the supplier “does not care” about late payments. The court found that the contractual terms were essential obligations and the principal had not waived the payment terms or acquiesced to accepting late payments. According to the Court, accepting late payments is different from acquiescing or tacitly consenting to them. Failure to pay on time affected the principal’s ability to sell equipment and led to credit holds which satisfied the “independent ground” for just cause in Section 278. In sum, accepting late payments did not operate to novate the payment terms in the agreement. Nor does providing a payment plan proscribe the principal from terminating the agreement in the future. It certainly did not help the dealer that, at the time of termination, it owed the principal $57k in unpaid invoices.
Notice of termination. The Court rejected an argument that Law 75 or the agreement required a “warning” or “threat” that the dealer’s contractual non-compliance would be a ground for termination. Although the termination letter “could have been better drafted” to provide “a succinct explanation” of the breaches of the agreement, there is no requirement in Law 75 that the supplier send the dealer written notice detailing every possible basis for termination. The only requirement is the existence of just cause and the agreement provided notice of the grounds for termination. The court held that the “cumulative weight” of the dealer’s “other contractual breaches” even if deemed non-essential (besides failing to pay on time that breached an essential obligation), was detrimental to the parties’ relationship and adversely and substantially affected the principal’s interests (and proved just cause).
Pretext. The Court rejected the dealer’s argument that the termination was a pretext to switch distributors. The Court found nothing wrong that the principal, to avoid a serious disruption in sales, had been looking for other distributors at the time of termination. “Prohibiting such a sensible approach...would deal a severe blow to our free enterprise system.”
Note: Before discovery and the filing of the MSJ, the Author served as the mediator in the case.
Sunday, October 14, 2012
Measure of damages for lost income revisited: net profits and a new rebuttable presumption to deduct variable expenses
Although Law 75 characterizes the infringing act giving rise to a claim as a tort, the computation of damages for lost profits arising from an unjustified impairment or termination of a dealer’s contract has its origins in contract principles derived from the civil or common law. For as long as I can remember, reputable experts in Law 75 cases have offered contradictory opinions on whether the computation of lost profits should be made after deducting fixed or only variable expenses, or some formulation in between. These formulations are tagged as the “straight line” approach or a modified approach etc. This area of the law has provoked one of the last few “accounting” or ‘economic” damages controversies that remains under Law 75. It should be settled by now that recovery of lost profits and goodwill is not per se duplicative (but there is substantial authority that recovery of goodwill is not necessarily permissible even if not duplicative). It is also settled that recovery is pre-tax. The last remaining frontier that still divides franchise lawyers and experts had been the allocation of costs to compute lost profits. The reason should be obvious: less deductions equals more profits and vice versa. For their part, courts have largely declined to adopt bright line rules, and in federal cases tried to juries, the weight of conflicting expert opinions has been left for juries to resolve as a matter of credibility. This is a tall task for laymen or lay women sitting in juries producing in some cases “split the baby” awards. Not to digress too much, but if you read the First Circuit's Rubbermaid case carefully you will see what I mean when a jury faces two party appointed experts and one court appointed expert on damages. It split the award down the middle.
While the Supreme Court of Puerto Rico’s recent and thoughtful opinion that I am about to discuss still leaves work ahead for both accountants and lawyers alike, it does offer substantially more clarity as to the proper methodology to compute claims of damages for lost income in all civil cases. I anticipate that, after this decision, courts have greater leeway and more responsibility as the gatekeepers to ensure reliable expert opinions to determine whether experts have the adequate foundation (e.g.,evidentiary basis of the operational costs) before allowing opinions to reach the jury. This is not fundamentally different from what has existed since Daubert, but at least now, the proper computation of damages is not necessarily a jury issue.
In El Coqui Landfill Inc. v. Municipio de Gurabo, 2012 TS 141 (P.R. Sept. 20, 2012)(Fiol-Matta, J.), the Court’s holding has four components, first, the proper computation is net, not gross profits; second, the expenses that must be deducted from the gross are those costs that claimant saved because of the impairment or termination of the contract (stated differently, those are generally called variable expenses in that claimant would have incurred those costs had defendant performed the contract and those costs may vary with the volume of sales); third, the definition of what is a variable or fixed cost is not rigid and may change depending on the industry or the business; fourth, and perhaps most important, claimant has the burden to overcome with business records and analysis the newly-created rebuttable presumption that costs are variable and should proportionally (depending on sales volumes) be deducted to compute net profits. In other words, claimant has the burden to prove that the costs are fixed or that it saved no costs because of the termination or impairment (two Justices dissented on this point).
The facts of El Coqui illustrate that the Court’s holding has far-reaching implications in Law 75 and tortious interference cases. There, plaintiff, a waste disposal company, had an exclusive contract to provide waste disposal services at the municipality’s landfill. The defendant municipality breached the contract with a third party who was liable in solidum for tortious interference. Plaintiff’s accounting manager, who was a CPA, testified that he computed the damages for the income lost during the duration of the contract, but did not deduct any costs from the gross because he said the costs of providing services were fixed not variable. The trial court awarded damages of $1.2 million plus interest at 4.25%, a judgment affirmed by the appellate court. The flaw in the accountant’s analysis, which caused the Supreme Court to modify and remand the judgment, was that the accountant’s conclusory testimony was devoid of business records, data, and analysis of the operational costs of the claimant’s business.
It remains unclear the quality or quantum of the evidence that a claimant must offer to overcome the rebuttable presumption that the costs are variable with the volume of sales and should be deducted from gross profits. I predict that there will be collateral litigation, as there has always been, over the allocation and amount of costs to determine the proper measure of lost profits. Another point that may go unnoticed is that the opinion of damages need not necessarily rest on an independent expert, but may rely on a certified public accountant employed by the company who has personal knowledge of the business. This may not bode well for independent experts at least when the claimant can count on a reliable in-house accountant or finance manager to testify about the measure of damages.
While the Supreme Court of Puerto Rico’s recent and thoughtful opinion that I am about to discuss still leaves work ahead for both accountants and lawyers alike, it does offer substantially more clarity as to the proper methodology to compute claims of damages for lost income in all civil cases. I anticipate that, after this decision, courts have greater leeway and more responsibility as the gatekeepers to ensure reliable expert opinions to determine whether experts have the adequate foundation (e.g.,evidentiary basis of the operational costs) before allowing opinions to reach the jury. This is not fundamentally different from what has existed since Daubert, but at least now, the proper computation of damages is not necessarily a jury issue.
In El Coqui Landfill Inc. v. Municipio de Gurabo, 2012 TS 141 (P.R. Sept. 20, 2012)(Fiol-Matta, J.), the Court’s holding has four components, first, the proper computation is net, not gross profits; second, the expenses that must be deducted from the gross are those costs that claimant saved because of the impairment or termination of the contract (stated differently, those are generally called variable expenses in that claimant would have incurred those costs had defendant performed the contract and those costs may vary with the volume of sales); third, the definition of what is a variable or fixed cost is not rigid and may change depending on the industry or the business; fourth, and perhaps most important, claimant has the burden to overcome with business records and analysis the newly-created rebuttable presumption that costs are variable and should proportionally (depending on sales volumes) be deducted to compute net profits. In other words, claimant has the burden to prove that the costs are fixed or that it saved no costs because of the termination or impairment (two Justices dissented on this point).
The facts of El Coqui illustrate that the Court’s holding has far-reaching implications in Law 75 and tortious interference cases. There, plaintiff, a waste disposal company, had an exclusive contract to provide waste disposal services at the municipality’s landfill. The defendant municipality breached the contract with a third party who was liable in solidum for tortious interference. Plaintiff’s accounting manager, who was a CPA, testified that he computed the damages for the income lost during the duration of the contract, but did not deduct any costs from the gross because he said the costs of providing services were fixed not variable. The trial court awarded damages of $1.2 million plus interest at 4.25%, a judgment affirmed by the appellate court. The flaw in the accountant’s analysis, which caused the Supreme Court to modify and remand the judgment, was that the accountant’s conclusory testimony was devoid of business records, data, and analysis of the operational costs of the claimant’s business.
It remains unclear the quality or quantum of the evidence that a claimant must offer to overcome the rebuttable presumption that the costs are variable with the volume of sales and should be deducted from gross profits. I predict that there will be collateral litigation, as there has always been, over the allocation and amount of costs to determine the proper measure of lost profits. Another point that may go unnoticed is that the opinion of damages need not necessarily rest on an independent expert, but may rely on a certified public accountant employed by the company who has personal knowledge of the business. This may not bode well for independent experts at least when the claimant can count on a reliable in-house accountant or finance manager to testify about the measure of damages.
Friday, September 21, 2012
Newborn Law 75 cases are moving upstream in the federal court
Both involve declaratory actions. In V. Suarez & Co. v. Welch’s Foods, Inc., No. 12-cv-1490 (FB), Puerto Rico’s largest distributor struck first in federal court asking for declaratory judgment and alleged potential (but not actual) termination damages alleging that VSC did not breach an obligation prohibiting activites with competing products in the distributorship agreement with Welch’s, a producer of grape juice products, when it acquired Campofresco, a local producer of Lotus-branded 100% juices, including grape juice. The case also involves allegations of an alleged impairment of contract from sales to club stores. The case is at the pleading stage and Welch’s will appear in due course to answer or move with respect to the Complaint. Note: The author represents Welch’s.
The other action, Quaker Oats Corp. v. Ballester Hermanos, Inc., No. 12-cv-1712 (GAG), involves an action by Quaker Oats for the Court to declare what the amount of damages will be under Law 75 in the event of an unjustified termination of the dealer’s contract. Quaker Oats concedes that Law 75 applies and that it would not have just cause, but the parties (or their experts) disagree as to the amount of potential damages. Quaker intends to terminate the relationship effective from the filing of the complaint and seeks a declaration of how much money it will cost. Stay tuned.
Tuesday, August 28, 2012
Is the floodgate open? McDonald Corporation’s disgruntled retail franchisees in Puerto Rico find coverage under Law 75
In a case with potentially far-reaching implications in the food services retail industry, the Court of Appeals, San Juan Division in AA& S Food Service Corp. v. McDonald’s Corporation, 2012 WL 2577784 (TCA, May 12, 2012), denied a petition for certiorari to vacate the lower court’s adoption of a report by a Special Commissioner (Angel Rossy, Esq.) that certain McDonald’s franchisees are protected by Law 75.
According to the court’s opinion, the complaint alleges that defendants intend to impair and terminate the established dealer relationships and appropriate the goodwill by requiring the franchisees to invest significant amounts of money to remodel stores and then force the franchisees to sell their franchise rights. In response to the franchisees’ motion for preliminary injunctive relief, McDonald’s moved to dismiss arguing that the franchise agreements were not distribution contracts within the meaning of Law 75. McDonald’s main argument was that the franchising contracts are atypical and resemble the franchise agreement in the Supreme Court’s Martin BBQ case which, according to McDonald’s counsel, was outside the scope of Law 75.
Applying the traditional factors in Lorenzana to determine who qualifies for Law 75 protection, the appellate court determined that the lower court was not arbitrary and capricious in adopting the report which found that the franchisees complied with most of the factors for Law 75 coverage, such as taking risks in signing the franchising agreements, investing in advertising and promotion, assuming the costs and responsibility of maintaining an inventory, and complying with standards of quality required by the franchisor.
Author’s Note:
Why did the Court of Appeals need to explain its reasons to deny certiorari, aside from maximizing the possibility of a denial of certiorari by the Supreme Court? It can hardly be said that the decision denying certiorari would be precedent in similar cases. The court’s reasoning could be criticized as dictum or as an advisory opinion. Be that as it may, the case may open the door to a potential class of Law 75 plaintiffs- including hundreds of retailers, franchisees, and mom and pop stores that resell products to the ultimate consumer. To me, the focus is not whether franchisees are excluded from Law 75 coverage as a matter of law- a proposition doubtful at best given Law 75’s broad definitions of “distributor” and “dealer’s contract” in §278(a)(b) to include a “franchise” … “on the market of Puerto Rico.” Rather, the opinion begs the threshold question whether retail franchisees have standing under Law 75 to claim the misappropriation of goodwill when the franchisor is the owner of its trademarks and associated goodwill developed from its investments worldwide in advertising and publicity. At least one federal case, Carana v. Jovani, 2009 WL 1299569 (D.P.R. 2009), held that Law 75 does not contemplate such recovery when the retailer free rides on the goodwill and clientele created by the franchisor of a famous or recognized brand.
Tuesday, August 7, 2012
Should an exclusive distributorship be implied from the supplier’s silence? Not according to a panel of the local appellate court.
In Next Step Medical Co. Inc. v. Bromedicon, Inc., 2012 WL 2399503 (TCA San Juan, May 23, 2012)(Dominguez-Irizarry, J.), the plaintiff-distributor filed suit for preliminary injunctive relief and damages under Law 75 in the Court of First Instance, San Juan Part, alleging an impairment with an alleged exclusive relationship for the distribution and servicing of medical products in Puerto Rico.
The facts are somewhat unusual, but crucial for the court’s conclusion that there was no meeting of the minds over exclusivity. The parties exchanged and amended two drafts of an exclusive distribution agreement. The distributor signed and delivered the last draft to the supplier’s principal who never signed it. Subsequently, the parties met to discuss contractual expectations and differences of opinion arose as to whether the supplier would be bound by a purported obligation not to offer competing products for the services required by the distributor. At no time during those meetings did the distributor allege the existence of an exclusive relationship. Nor was an exclusive agreement ever signed. The distributor filed suit when the supplier began to offer the same medical services through other entities.
The standards for preliminary injunctions in Law 75 cases are straightforward and addressed at length in the appellate court’s opinion. The appellate court affirmed the trial court’s denial of preliminary injunctive relief reasoning that the distributor had failed to establish irreparable harm as there was no evidence of actual damages and the sales of the line at issue were small when compared to total company sales; the distributor had failed to show convincingly the existence of an exclusive dealership necessary to prove likelihood of success on the merits; the allegation of harm to reputation was not substantiated and it incurred in laches. The court in effect affirmed the judgment by denying the petition for certiorari.
Saturday, July 28, 2012
Twists and turns of the V. Suarez and Bacardi arbitration to validate a measure of potential damages in a sub-distribution agreement governed by Law 75
After a business relationship of five years turned sour, Bacardi and V. Suarez parted ways, but not before the sub-distributor alleged a $30mm termination claim under Law 75. A three-lawyer Panel of the AAA decided, by a 2-1 vote in a reasoned opinion, that contractual provisions to compute potential damages were valid, binding, and enforceable under Law 75. Any damages from a termination of the sub-distribution agreement, if determined to be without just cause, would be set off from the “distribution value” owned by Bacardi.
Because Bacardi created the goodwill and clientele for its brands and products and the sub-distributor paid no consideration to obtain the exclusive sub-distribution rights, the parties agreed that the sub-distributor would recover compensatory damages from an unjustified termination only to the extent that its net profits on the sale and distribution of Bacardi’s products exceeded the “distribution value” at relevant times. The sub-distributor V. Suarez argued that the damages provision was null and void as a “waiver of rights” under Law 75 because of the prospect that it could recover nothing from a termination.
In an opinion of first impression, the Panel sided with Bacardi. Litigation in both local and federal courts quickly followed. V. Suarez first filed a proceeding- D AC2011-2354 (402)- in Bayamon local court to invalidate the award under Puerto Rico’s arbitration statute. VSC claimed that the Panel’s majority outcome was biased and the award should also be set aside for legal error as it allegedly violates Law 75’s policy against waiver of rights.
Bacardi responded with two shots: it removed the vacatur proceeding to federal court and filed a separate motion to confirm the award under Section 9 of the Federal Arbitration Act. After consolidation of the proceedings, the federal court remanded the removed case concluding that there was no complete diversity jurisdiction and applied Rule 19 to dismiss the independent proceeding to confirm the award for lack of an indispensable party. The court’s opinion is reported at V. Suarez v. Bacardi Intern., 826 F. Supp. 2d 433 (D.P.R. 2011), appeal pend’g. The court’s opinion overlooked Bacardi’s threshold argument that FRCP 81preempts the Federal Rules when the FAA establishes the procedures to confirm awards and there was complete diversity jurisdiction on the face of the motion to confirm. This novel procedural issue in the First Circuit remains pending on appeal in No. 12-1032.
Meanwhile, after hearing extensive oral argument from the parties, the Court of First Instance issued on July 18, 2012 an opinion denying V. Suarez’ motion to vacate. Accordingly, it confirmed the award. The court rejected the argument that the Panel was biased simply because it ruled in Bacardi’s favor. The court further held that the FAA governed the sub-distribution agreement; that the choice of Puerto Rico substantive law provision and the incorporation of the AAA rules in the agreement were not intended to incorporate Puerto Rico’s arbitration laws and rules to review awards; that the FAA’s standard to review awards under Section 10 preempted Puerto Rico’s arbitration law or rules; the award was enforceable under Section 10 of the FAA and alternatively, it did not violate the manifest disregard standard assuming it survived the Supreme Court’s Hall Street precedent; finally and in any event, the Award was legally sound and correct.
About the wisdom of the damages methodology in the agreement, Judge Sylvette A. Quinones-Mari wrote: “In this case there has been no waiver, express or implied, by the distributor protected by Law 75. Law 75 does not prohibit sophisticated parties from agreeing in advance, after exchanging financial information and negotiating extensively, to determine the distribution rights and goodwill of the principal over a brand that is recognized worldwide, with an established clientele and over which the principal has invested millions of dollars to promote and develop it.” (translation ours).
Monday, April 9, 2012
Verbal statements of exclusivity are insufficient by themselves to prove the existence of an exclusive distributorship under Law 75.
In Medina & Medina, Inc. v. Hormel Foods Corporation, No. 09-1098 (JAG)(March 30, 2012), the federal court adopted, in part, Magistrate Lopez' “well-thought out” R&R to deny the distributor’s motion for summary judgment and allow the principal’s partial motion for summary judgment.
There were two main issues. First, was there exclusivity? On summary judgment, the distributor Medina claimed an exclusive distributorship for certain products based on a verbal authorization by an officer of Hormel for Medina to distribute Hormel’s products. Medina also introduced a letter of Hormel referring to Medina as the “primary if not the exclusive partner.” Nonetheless, Hormel disputed the assertion of exclusivity as the parties did not agree on the scope and terms for the distribution of the products. There was no written contract and Hormel contested the assertion of exclusivity. Reinforcing the argument that exclusivity is a right conferred by the principal, the court noted “Medina seems to think that the fact that Hormel may not have had another distributor in Puerto Rico means that Medina was by definition Hormel’s exclusive distributor. The Court fails to find this line of reasoning persuasive.” The reader should observe that there is precedent that exclusivity is determined by the contract between the parties and the course of dealings. But, none of the cases has supported allowing summary judgment for a distributor based solely on a course of dealings and at least in the absence of a written exclusive agreement. Finding it was a stretch to allow the distributor’s motion for summary judgment, the court adopted the Magistrate’s R&R finding material issues of fact precluding the distributor’s motion for summary judgment.
Two, did the existing dealer relationship prohibit sales by Hormel to mainland distributors? The court analyzed the trilogy of impairment cases involving sales to mainland distributors: The First Circuit’s Irvine decision, and district courts’ decisions in Sterling and Di Giorgio and concluded that the factual situation in this case was not analogous to the other cases because Hormel had sold its products directly to mainland distributors. Despite the Magistrate’s conclusion that Law 75 would reach to proscribe those sales, it determined that the existing agreement did not prohibit Hormel’s sales to stateside distributors and recommended granting Hormel’s motion for summary judgment to dismiss that claim. The Magistrate gave weight to Medina’s failure over many years to contest Hormel’s sales to mainland distributors. The court concurred and adopted the Magistrate’s recommendation on the alternate ground that the impairment of contract claim was time-barred under the Commerce Code’s three-year caducity period. Finding that, at least since 2005, Medina had been aware that Hormel would continue to sell to mainland distributors despite its objections (Medina wanted better prices), the claim for impairment under Law 75 was time barred. As to the issue whether the existing agreement (i.e., the business relationship created from the course of dealings) prohibited direct sales to mainland distributors, the issue turned moot because the court concluded that Medina’s claims arising from sales to mainland distributors, though covered by Law 75, are time barred. Presumably, the impairment claim for damages that remains alive after the court’s ruling arises from sales within Puerto Rico if a jury concludes that Medina and Hormel had an exclusive agreement for certain products.
There were two main issues. First, was there exclusivity? On summary judgment, the distributor Medina claimed an exclusive distributorship for certain products based on a verbal authorization by an officer of Hormel for Medina to distribute Hormel’s products. Medina also introduced a letter of Hormel referring to Medina as the “primary if not the exclusive partner.” Nonetheless, Hormel disputed the assertion of exclusivity as the parties did not agree on the scope and terms for the distribution of the products. There was no written contract and Hormel contested the assertion of exclusivity. Reinforcing the argument that exclusivity is a right conferred by the principal, the court noted “Medina seems to think that the fact that Hormel may not have had another distributor in Puerto Rico means that Medina was by definition Hormel’s exclusive distributor. The Court fails to find this line of reasoning persuasive.” The reader should observe that there is precedent that exclusivity is determined by the contract between the parties and the course of dealings. But, none of the cases has supported allowing summary judgment for a distributor based solely on a course of dealings and at least in the absence of a written exclusive agreement. Finding it was a stretch to allow the distributor’s motion for summary judgment, the court adopted the Magistrate’s R&R finding material issues of fact precluding the distributor’s motion for summary judgment.
Two, did the existing dealer relationship prohibit sales by Hormel to mainland distributors? The court analyzed the trilogy of impairment cases involving sales to mainland distributors: The First Circuit’s Irvine decision, and district courts’ decisions in Sterling and Di Giorgio and concluded that the factual situation in this case was not analogous to the other cases because Hormel had sold its products directly to mainland distributors. Despite the Magistrate’s conclusion that Law 75 would reach to proscribe those sales, it determined that the existing agreement did not prohibit Hormel’s sales to stateside distributors and recommended granting Hormel’s motion for summary judgment to dismiss that claim. The Magistrate gave weight to Medina’s failure over many years to contest Hormel’s sales to mainland distributors. The court concurred and adopted the Magistrate’s recommendation on the alternate ground that the impairment of contract claim was time-barred under the Commerce Code’s three-year caducity period. Finding that, at least since 2005, Medina had been aware that Hormel would continue to sell to mainland distributors despite its objections (Medina wanted better prices), the claim for impairment under Law 75 was time barred. As to the issue whether the existing agreement (i.e., the business relationship created from the course of dealings) prohibited direct sales to mainland distributors, the issue turned moot because the court concluded that Medina’s claims arising from sales to mainland distributors, though covered by Law 75, are time barred. Presumably, the impairment claim for damages that remains alive after the court’s ruling arises from sales within Puerto Rico if a jury concludes that Medina and Hormel had an exclusive agreement for certain products.
Monday, February 27, 2012
Puerto Rico Supreme Court issues order to show cause as to why it should not reverse appellate court’s refusal to compel arbitration of Law 75 dispute
It is worrisome that some lower courts in Puerto Rico still find ways not to enforce arbitration agreements. The latest is a theory that, if the contracting parties lack the necessary information to provide an informed consent to the implications of arbitration, the arbitration provision is invalid.
A sub-distributor of Nissan motor vehicles filed suit in the Court of First Instance, San Juan Part, against Motorambar, the general distributor, invoking Laws 21, 75 and asserting claims for breach of contract and preliminary and permanent injunctive relief. The dispute originated when Motorambar purportedly attempted to change the exclusive nature of the relationship in a designated territory and terminated the relationship when the sub-distributor refused to acquiesce to change the existing dealer agreement.
Motorambar moved to dismiss and to compel arbitration alleging that the dealer agreement has an arbitration clause. The sub-distributor responded that there was no obligation to arbitrate as the dealer agreement had expired; that the agreement was null and void, and that it was governed by Puerto Rico’s arbitration statute, 32 LPRA §3201 and not by the Federal Arbitration Act. The trial court refused to dismiss the action in favor of arbitration reasoning that an evidentiary hearing was required before deciding the validity of the arbitration provision. After an evidentiary hearing, the trial court invalidated the arbitration provision on a theory of lack of informed consent. The trial court also rejected a constitutional attack under the FAA to Article 3C of Law 75 that requires a court to validate the voluntariness of arbitration provisions in Law 75 cases.
A Panel of the Court of Appeals denied both Motorambar’s motion to stay and a petition for certiorari. In L.M. Quality Motors Inc. v. Motorambar, Inc., 2011 TSPR 158 (P.R. Oct. 28, 2011), by a vote of 5-4, the Supreme Court of Puerto Rico stayed injunction proceedings in the trial court and entered an order to show cause as to why the appellate court’s decision should not be reversed. The majority did not issue a reasoned opinion but likely will reverse. Four Justices of the Court explained in the dissent that there was sufficient evidence to invalidate the arbitration agreement for lack of informed consent and did not believe that the FAA preempted the application of Puerto Rico’s commercial arbitration law in the circumstances of this case. Stay tuned.
Update: Since then, the local court denied the sub-distributor's request for preliminary injunctive relief to maintain the status quo pending further proceedings. Not surprisingly, Motorambar filed a motion for voluntary dismissal of its certiorari petition in the Supreme Court noting that it would be more efficient to try the case in the local court than to arbitrate. The motion to dismiss, if allowed, would moot the appeal.
A sub-distributor of Nissan motor vehicles filed suit in the Court of First Instance, San Juan Part, against Motorambar, the general distributor, invoking Laws 21, 75 and asserting claims for breach of contract and preliminary and permanent injunctive relief. The dispute originated when Motorambar purportedly attempted to change the exclusive nature of the relationship in a designated territory and terminated the relationship when the sub-distributor refused to acquiesce to change the existing dealer agreement.
Motorambar moved to dismiss and to compel arbitration alleging that the dealer agreement has an arbitration clause. The sub-distributor responded that there was no obligation to arbitrate as the dealer agreement had expired; that the agreement was null and void, and that it was governed by Puerto Rico’s arbitration statute, 32 LPRA §3201 and not by the Federal Arbitration Act. The trial court refused to dismiss the action in favor of arbitration reasoning that an evidentiary hearing was required before deciding the validity of the arbitration provision. After an evidentiary hearing, the trial court invalidated the arbitration provision on a theory of lack of informed consent. The trial court also rejected a constitutional attack under the FAA to Article 3C of Law 75 that requires a court to validate the voluntariness of arbitration provisions in Law 75 cases.
A Panel of the Court of Appeals denied both Motorambar’s motion to stay and a petition for certiorari. In L.M. Quality Motors Inc. v. Motorambar, Inc., 2011 TSPR 158 (P.R. Oct. 28, 2011), by a vote of 5-4, the Supreme Court of Puerto Rico stayed injunction proceedings in the trial court and entered an order to show cause as to why the appellate court’s decision should not be reversed. The majority did not issue a reasoned opinion but likely will reverse. Four Justices of the Court explained in the dissent that there was sufficient evidence to invalidate the arbitration agreement for lack of informed consent and did not believe that the FAA preempted the application of Puerto Rico’s commercial arbitration law in the circumstances of this case. Stay tuned.
Update: Since then, the local court denied the sub-distributor's request for preliminary injunctive relief to maintain the status quo pending further proceedings. Not surprisingly, Motorambar filed a motion for voluntary dismissal of its certiorari petition in the Supreme Court noting that it would be more efficient to try the case in the local court than to arbitrate. The motion to dismiss, if allowed, would moot the appeal.
Sunday, January 8, 2012
Federal Court enforces arbitration award of $3.7 million under Law 75 in favor of Puerto Rico distributor
In Thomas Diaz Inc. v. Colombina, S.A., 2011 WL 6056717 (D.P.R. Dec. 6, 2011)(PG), Thomas Diaz Inc. (TDI), a Puerto Rico distributor of candies, successfully arbitrated a dispute with Colombina Inc., a Colombian corporation. The sole arbitrator was Angel (Paco) Rossy, a prominent retired Judge of the Court of Appeals of Puerto Rico. Arbitrator Rossy had been the Chairman of the Panel in the Mendez & Co. Inc. arbitration under Law 75 previously reported in this Blog. Mendez prevailed in the arbitration and recovered substantial damages.
After bifurcating liability from damages, the Arbitrator found that Colombina had terminated a forty-year relationship without just cause and awarded TDI substantial damages under Law 75 for lost profits, loss of goodwill, costs, legal interest and expenses. The Arbitrator adopted the contribution of revenues approach deducting only certain variable expenses- a methodology endorsed by the Ballester and Goya line of federal cases to compute five years worth of lost profits from a termination. For goodwill, the Arbitrator was persuaded by the capitalization of future earnings approach over the IRS excess earnings method, which came with a seal of approval by the Puerto Rico Supreme Court’s Dayco decision. The record does not reflect the reasons for the termination. It does not appear that the Arbitrator considered or awarded attorney’s fees to the prevailing party under Law 75. Colombina did not challenge the partial award finding no just cause for the termination.
In May 2010, TDI filed a motion (improperly denominated a “complaint”) to confirm the award in federal court under Section 9 of the FAA invoking the court’s diversity jurisdiction. Colombina filed a cross motion to vacate or modify the award. Following the Supreme Court’s Hall Street decision and noting the extremely deferential grounds for review of arbitration awards, the District Court (Perez-Gimenez,J) held that the FAA preempted Puerto Rico’s arbitration statute to the extent that it provides “lesser protection” for the enforcement of arbitration awards. The court then confirmed the award and denied the motion to vacate concluding that the Arbitrator’s Award is plausible, supported by the record, and based on valid legal principles. The court denied TDI’s request for attorney’s fees for the enforcement action finding that Colombina was not frivolous to challenge the award at least taking into account its size.
Colombina’s advocacy could not have helped its cause as the District Court found many of its arguments incomprehensible and deemed waived. Courts often wave goodbye and leave unpunished uncivil or overzealous litigation providing no deterrent for future misdeeds, but this Judge would have none of it as can be appreciated from the Court’s footnote:
“…When making reference to the Arbitrator’s Award, the Defendant’s motion to vacate (Docket No. 29) is riddled with empty phrases such as “blindly capricious ... adoption,” “blatant disregard of law,” “basic flawed assumption,” “such flawed logic,” “palpably faulty,” “patently absurd and faulty assumption,” “draconian windfall of punitive nature,” “magical tergiversational twist of ... financial realities” among others. The Court had to ferret through the motion in order ascertain the grounds of Defendant’s objections to the Arbitrator’s award. Therefore, to the extent the Defendant’s arguments were unclear or incomprehensible to this Court, the same are hereby disregarded.”
In the end, reasonable persons can disagree and take sides with the damages methodology of the Award, but the rule of law prevailed when the District Court, albeit not so promptly, confirmed the award into a Judgment.
After bifurcating liability from damages, the Arbitrator found that Colombina had terminated a forty-year relationship without just cause and awarded TDI substantial damages under Law 75 for lost profits, loss of goodwill, costs, legal interest and expenses. The Arbitrator adopted the contribution of revenues approach deducting only certain variable expenses- a methodology endorsed by the Ballester and Goya line of federal cases to compute five years worth of lost profits from a termination. For goodwill, the Arbitrator was persuaded by the capitalization of future earnings approach over the IRS excess earnings method, which came with a seal of approval by the Puerto Rico Supreme Court’s Dayco decision. The record does not reflect the reasons for the termination. It does not appear that the Arbitrator considered or awarded attorney’s fees to the prevailing party under Law 75. Colombina did not challenge the partial award finding no just cause for the termination.
In May 2010, TDI filed a motion (improperly denominated a “complaint”) to confirm the award in federal court under Section 9 of the FAA invoking the court’s diversity jurisdiction. Colombina filed a cross motion to vacate or modify the award. Following the Supreme Court’s Hall Street decision and noting the extremely deferential grounds for review of arbitration awards, the District Court (Perez-Gimenez,J) held that the FAA preempted Puerto Rico’s arbitration statute to the extent that it provides “lesser protection” for the enforcement of arbitration awards. The court then confirmed the award and denied the motion to vacate concluding that the Arbitrator’s Award is plausible, supported by the record, and based on valid legal principles. The court denied TDI’s request for attorney’s fees for the enforcement action finding that Colombina was not frivolous to challenge the award at least taking into account its size.
Colombina’s advocacy could not have helped its cause as the District Court found many of its arguments incomprehensible and deemed waived. Courts often wave goodbye and leave unpunished uncivil or overzealous litigation providing no deterrent for future misdeeds, but this Judge would have none of it as can be appreciated from the Court’s footnote:
“…When making reference to the Arbitrator’s Award, the Defendant’s motion to vacate (Docket No. 29) is riddled with empty phrases such as “blindly capricious ... adoption,” “blatant disregard of law,” “basic flawed assumption,” “such flawed logic,” “palpably faulty,” “patently absurd and faulty assumption,” “draconian windfall of punitive nature,” “magical tergiversational twist of ... financial realities” among others. The Court had to ferret through the motion in order ascertain the grounds of Defendant’s objections to the Arbitrator’s award. Therefore, to the extent the Defendant’s arguments were unclear or incomprehensible to this Court, the same are hereby disregarded.”
In the end, reasonable persons can disagree and take sides with the damages methodology of the Award, but the rule of law prevailed when the District Court, albeit not so promptly, confirmed the award into a Judgment.
Monday, December 5, 2011
Declaratory judgment is appropriate vehicle to obtain declaration of just cause for termination of agreement in Law 75 case
In General Motors v. Royal Motors Corp., 769 F. Supp. 2d 73 (D.P.R. Feb. 1, 2011)(Gelpí, J.), GM filed a preemptive suit against one of its dealers seeking a declaration under 28 U.S.C. §2201 that it had just cause for termination of the motor vehicle dealer agreement with one of its dealers. GM alleged that the dealer submitted false or fraudulent claims related to warranty repairs of vehicles which constituted a material breach of the agreement. GM pleaded complete diversity of citizenship and the amount in controversy exceeded the requisite jurisdictional amount.
The dealer moved to dismiss the action for lack of subject matter jurisdiction. It alleged that the complaint did not satisfy the jurisdictional minimum and did not present a justiciable controversy. The court held that the amount in controversy “is measured by the value of the object in the litigation.” Because the “value of the dealer agreement” exceeds the jurisdictional minimum, the court denied the motion to dismiss on that basis.
As to the justiciability of the claim, the court found that the federal Declaratory Judgment Act “is designed to enable litigants to clarify legal rights and obligations before acting on them.” “GM’s right to terminate its contractual relationship is the exact type of dispute considered ripe for declaratory judgment”, held the court. The court also found that GM showed the hardship it would suffer absent a judicial determination of its rights and denied the motion to dismiss.
Note: CAB represents General Motors in the litigation.
The dealer moved to dismiss the action for lack of subject matter jurisdiction. It alleged that the complaint did not satisfy the jurisdictional minimum and did not present a justiciable controversy. The court held that the amount in controversy “is measured by the value of the object in the litigation.” Because the “value of the dealer agreement” exceeds the jurisdictional minimum, the court denied the motion to dismiss on that basis.
As to the justiciability of the claim, the court found that the federal Declaratory Judgment Act “is designed to enable litigants to clarify legal rights and obligations before acting on them.” “GM’s right to terminate its contractual relationship is the exact type of dispute considered ripe for declaratory judgment”, held the court. The court also found that GM showed the hardship it would suffer absent a judicial determination of its rights and denied the motion to dismiss.
Note: CAB represents General Motors in the litigation.
Thursday, December 1, 2011
Plaintiff wins a remand to local court but loses a tortious interference claim in federal court: was it a pyrrhic victory?
In Alpha Biomedical v. Phillips Medical, 2011 WL 5837374 (D.P.R., Nov. 21, 2011)(Besosa, J.), Plaintiff, a distributor of medical equipment, filed an action in local court asserting claims under Law 75, tortious interference, and defamation against various Phillips corporations for breach and interference with an alleged verbal distribution contract. Defendants removed the case alleging that certain non-diverse defendants had been fraudulently joined to defeat diversity. Plaintiff moved to remand. A U.S. Magistrate recommended that the action should be remanded, which the Court adopted. The Magistrate (Silvia Carreno, J.) found that the standard of fraudulent joinder was unsettled in the First Circuit and adopted a prong of a Fifth Circuit test whether Plaintiff fails to state a claim upon which relief can be granted against the non-diverse defendants. She determined that the complaint properly pleaded a claim for defamation and there could not be a finding of fraudulent joinder.
Things then get tricky. While the Magistrate’s determination on the existence of a valid defamation claim sufficed to require granting the motion to remand for lack of jurisdiction, the Magistrate went further and concluded that Plaintiff failed to state a claim for tortious interference, which the Court agreed. Was there subject matter jurisdiction to make such a recommendation? The issue was not addressed in the opinion. Over Plaintiff’s objection, the Court held that Puerto Rico law would not recognize a valid claim for tortious interference with a verbal contract having an indefinite term and is terminable at will. Law 75 contracts without a fixed term could become indefinite in the sense there can be no lawful termination without just cause. However, Plaintiff’s allegations were defective in that it failed to allege the duration of the alleged verbal agreement or that it was in effect at the time of the alleged interference. The Court adopted both the recommendation to remand the case for lack of jurisdiction and the decision not to award attorney’s fees as the removal was objectively reasonable, citing Martin v. Franklin, 546 U.S. 132, 141 (2005).
Would the Court’s adoption of the Magistrate’s recommendation that no valid tortious interference claim exists be res judicata upon remand of the case to local court? It is questionable whether the court’s de facto dismissal of the tortious interference claim is reviewable on appeal when a remand order is not. The court’s determination that a valid defamation claim exists was enough to remand the case for lack of jurisdiction. It remains to be seen if the local court will pass judgment independently on the Court’s reasoning or conclude that the determination to dismiss the tort claim is res judicata. Did Plaintiff really win at all with remanding the case?
Things then get tricky. While the Magistrate’s determination on the existence of a valid defamation claim sufficed to require granting the motion to remand for lack of jurisdiction, the Magistrate went further and concluded that Plaintiff failed to state a claim for tortious interference, which the Court agreed. Was there subject matter jurisdiction to make such a recommendation? The issue was not addressed in the opinion. Over Plaintiff’s objection, the Court held that Puerto Rico law would not recognize a valid claim for tortious interference with a verbal contract having an indefinite term and is terminable at will. Law 75 contracts without a fixed term could become indefinite in the sense there can be no lawful termination without just cause. However, Plaintiff’s allegations were defective in that it failed to allege the duration of the alleged verbal agreement or that it was in effect at the time of the alleged interference. The Court adopted both the recommendation to remand the case for lack of jurisdiction and the decision not to award attorney’s fees as the removal was objectively reasonable, citing Martin v. Franklin, 546 U.S. 132, 141 (2005).
Would the Court’s adoption of the Magistrate’s recommendation that no valid tortious interference claim exists be res judicata upon remand of the case to local court? It is questionable whether the court’s de facto dismissal of the tortious interference claim is reviewable on appeal when a remand order is not. The court’s determination that a valid defamation claim exists was enough to remand the case for lack of jurisdiction. It remains to be seen if the local court will pass judgment independently on the Court’s reasoning or conclude that the determination to dismiss the tort claim is res judicata. Did Plaintiff really win at all with remanding the case?
Sunday, September 11, 2011
A powerful weapon in the arsenal: the new trade secrets Puerto Rico Law No. 80 of June 3, 2011 would provide substantial remedies for violations of confidentiality obligations in distribution contracts
Distribution contracts generally contain provisions protecting confidential business information, such as client lists, price lists, marketing and other business plans and strategies.
It used to be that a party affected by a breach of a confidentiality obligation had to sue in tort or breach of contract under the Civil Code with the burden to establish the existence of a trade secret under the rules of evidence and prove damages. Law 75 did not provide a claim for relief. In the distribution context, breach of confidentiality issues may arise when a key employee with access to confidential information leaves the firm to a competitor or to the other contracting party, or when the principal terminates the contract and the distributor uses confidential information obtained during the relationship for its financial benefit (or the other way around).
On June 3, 2011, the Legislature of Puerto Rico enacted a far-reaching law protecting trade secrets and providing substantial remedies for unauthorized violations. The law is patterned after the Uniform Trade Secrets Act.
The elements of a claim under Law 80 are: 1) proof of a “commercial secret” (a defined term meaning information which provides an actual or potential economic benefit, is not public, and whose confidentiality has been maintained by reasonable means); 2) the commercial secret has been misappropriated; and 3) it has caused damages to the owner.
The statute provides preliminary, permanent injunctive relief, and the payment of royalties in extraordinary circumstances. The measure of damages can be substantial; including actual damages and “additional damages” to the extent that the offending party has derived a benefit from the use of the confidential information, or in the alternative, the payment of royalties. The measure of damages includes lost profits, the value it would have cost to develop the information, depreciation, development costs, and market value of the information.
If the violation was intentional or in bad faith, the court has discretion to award three times the amount of actual damages and grant attorney’s fees. The Law supplements any remedies that the parties may have under the contract and other laws. Thus, regardless of any contractual provision, Law 80 provides relief to the owner for damages caused from the misappropriation of commercial secrets.
Law 80 claims will most certainly arise in the labor-employment context and in actions involving a breach of fiduciary duties. But, Law 80 will become relevant in commercial litigation as well. I would expect that a Law 80 trade secret claim will go hand in hand with trademark infringement claims and those under Law 75. Because of its recent enactment, there is no case law so far interpreting its provisions.
It used to be that a party affected by a breach of a confidentiality obligation had to sue in tort or breach of contract under the Civil Code with the burden to establish the existence of a trade secret under the rules of evidence and prove damages. Law 75 did not provide a claim for relief. In the distribution context, breach of confidentiality issues may arise when a key employee with access to confidential information leaves the firm to a competitor or to the other contracting party, or when the principal terminates the contract and the distributor uses confidential information obtained during the relationship for its financial benefit (or the other way around).
On June 3, 2011, the Legislature of Puerto Rico enacted a far-reaching law protecting trade secrets and providing substantial remedies for unauthorized violations. The law is patterned after the Uniform Trade Secrets Act.
The elements of a claim under Law 80 are: 1) proof of a “commercial secret” (a defined term meaning information which provides an actual or potential economic benefit, is not public, and whose confidentiality has been maintained by reasonable means); 2) the commercial secret has been misappropriated; and 3) it has caused damages to the owner.
The statute provides preliminary, permanent injunctive relief, and the payment of royalties in extraordinary circumstances. The measure of damages can be substantial; including actual damages and “additional damages” to the extent that the offending party has derived a benefit from the use of the confidential information, or in the alternative, the payment of royalties. The measure of damages includes lost profits, the value it would have cost to develop the information, depreciation, development costs, and market value of the information.
If the violation was intentional or in bad faith, the court has discretion to award three times the amount of actual damages and grant attorney’s fees. The Law supplements any remedies that the parties may have under the contract and other laws. Thus, regardless of any contractual provision, Law 80 provides relief to the owner for damages caused from the misappropriation of commercial secrets.
Law 80 claims will most certainly arise in the labor-employment context and in actions involving a breach of fiduciary duties. But, Law 80 will become relevant in commercial litigation as well. I would expect that a Law 80 trade secret claim will go hand in hand with trademark infringement claims and those under Law 75. Because of its recent enactment, there is no case law so far interpreting its provisions.
Saturday, September 3, 2011
The battle in arbitration under Law 75 between Puerto Rico’s largest distributor and the world’s leading producer of rum reaches federal district court
The Puerto Rico sub-distributor V. Suarez filed an action in local Bayamon court, where it has its principal place of business, seeking to vacate a commercial arbitration award under Puerto Rico law. The principal Bacardi countered with a removal of the action to federal court and the filing of a separate federal action to confirm the award under the Federal Arbitration Act.
As reported in my previous blog, a commercial arbitration panel of the AAA ruled in favor of Bacardi, as a matter of first impression, that sophisticated parties may, by contract, predetermine the methodology to value the principal’s direct contribution and goodwill associated with the line and set off that value from the distributor’s actual damages in the event of an unlawful termination under Law 75.
The award is part of the public record in the proceedings to vacate and confirm the award. The cases pending in the U.S. District Court of Puerto Rico are styled V. Suarez & Co. v. Bacardi International Limited, No. 11-01858 (GAG) and Bacardi International Limited v. V. Suarez & Co. Inc., No. 11-01871. Stay tuned.
As reported in my previous blog, a commercial arbitration panel of the AAA ruled in favor of Bacardi, as a matter of first impression, that sophisticated parties may, by contract, predetermine the methodology to value the principal’s direct contribution and goodwill associated with the line and set off that value from the distributor’s actual damages in the event of an unlawful termination under Law 75.
The award is part of the public record in the proceedings to vacate and confirm the award. The cases pending in the U.S. District Court of Puerto Rico are styled V. Suarez & Co. v. Bacardi International Limited, No. 11-01858 (GAG) and Bacardi International Limited v. V. Suarez & Co. Inc., No. 11-01871. Stay tuned.
Sunday, July 31, 2011
In a case of first impression, a commercial arbitration panel of the AAA validates provisions for the computation of damages in a distribution agreement governed by Law 75
In a watershed ruling, a commercial arbitration panel of the American Arbitration Association has decided that sophisticated corporations may pre-determine the methodology for computing actual damages in the event of a future termination of the business relationship without violating Law 75.
There, a renowned worldwide producer of liquor entered into a distribution agreement with a Puerto Rico distributor. The brands and products that were subject to the agreement were famous, had an established goodwill in the Puerto Rico market, and produced significant annual revenues to the previous distributor, an entity affiliated to the producer. The agreement did not require the new distributor to pay a franchise fee, make any capital investments, or provide any consideration in exchange for the exclusive distribution rights.
The parties negotiated at arms-length with the advice of counsel and agreed on the formula to compute damages in the event of a termination without just cause. Essentially, the agreement established the annual distribution value of the exclusive distribution rights owned by the producer that would be conditionally granted to the distributor. The distribution value was based on actual historical data of revenues generated by sales of the products in the Puerto Rico market and an estimate of the new distributor’s direct costs. If the measure of actual damages under Law 75 was less than the distribution value, the distributor would recover zero damages in the event of an unjustified termination. Under the agreement, the distributor could only recover the excess profits generated by its efforts to the extent that those exceeded the distribution value.
The distributor argued that the damages provisions infringed Law 75 as a waiver of rights, but a majority of the panel disagreed. The Panel recognized that the Puerto Rico distributor cannot recover for the franchisor’s goodwill and value of its trademarks. Further, the measure for computing damages did not violate Law 75 because there is no prohibition from valuing the manufacturer’s goodwill (which the distributor did not create or contribute) and setting off that value from the measure of actual damages under Law 75. Damages under Law 75 are not automatic or mandatory, ruled the panel in favor of the producer.
This decision may have a significant impact in the way that distribution agreements are negotiated and executed, especially for famous brands that have an established clientele and goodwill in the Puerto Rico market.
Author’s note: The undersigned is lead counsel for the producer in the arbitration proceedings, with Rosalie Irizarry participating as trial counsel and Natalia Morales for research and motion practice.
There, a renowned worldwide producer of liquor entered into a distribution agreement with a Puerto Rico distributor. The brands and products that were subject to the agreement were famous, had an established goodwill in the Puerto Rico market, and produced significant annual revenues to the previous distributor, an entity affiliated to the producer. The agreement did not require the new distributor to pay a franchise fee, make any capital investments, or provide any consideration in exchange for the exclusive distribution rights.
The parties negotiated at arms-length with the advice of counsel and agreed on the formula to compute damages in the event of a termination without just cause. Essentially, the agreement established the annual distribution value of the exclusive distribution rights owned by the producer that would be conditionally granted to the distributor. The distribution value was based on actual historical data of revenues generated by sales of the products in the Puerto Rico market and an estimate of the new distributor’s direct costs. If the measure of actual damages under Law 75 was less than the distribution value, the distributor would recover zero damages in the event of an unjustified termination. Under the agreement, the distributor could only recover the excess profits generated by its efforts to the extent that those exceeded the distribution value.
The distributor argued that the damages provisions infringed Law 75 as a waiver of rights, but a majority of the panel disagreed. The Panel recognized that the Puerto Rico distributor cannot recover for the franchisor’s goodwill and value of its trademarks. Further, the measure for computing damages did not violate Law 75 because there is no prohibition from valuing the manufacturer’s goodwill (which the distributor did not create or contribute) and setting off that value from the measure of actual damages under Law 75. Damages under Law 75 are not automatic or mandatory, ruled the panel in favor of the producer.
This decision may have a significant impact in the way that distribution agreements are negotiated and executed, especially for famous brands that have an established clientele and goodwill in the Puerto Rico market.
Author’s note: The undersigned is lead counsel for the producer in the arbitration proceedings, with Rosalie Irizarry participating as trial counsel and Natalia Morales for research and motion practice.
Tuesday, July 5, 2011
First Circuit vacates final judgment for a supplier in a Law 75 case after consolidation of a preliminary injunction hearing with a bench trial on the merits did not provide adequate prior notice.
In Lamex Foods v. Audeliz Lebron, No. 10-1677 (1st Cir. June 27, 2011), the First Circuit vacated the District Court’s (Fusté, J.) Judgment holding that consolidation of a preliminary injunction hearing with a bench trial on the merits without providing adequate and clear prior notice violated the constitutional right to a jury trial.
Plaintiff Lamex is a Minnesota corporation that facilitates the sale of food from manufacturers to suppliers and vendors worldwide. Plaintiff entered into a “business relationship” where it purchased frozen chicken for resale to Defendant ALC, a Puerto Rico corporation, that supplies product to supermarkets and retailers in Puerto Rico. In 2009, after failed collection attempts, ALC fell behind in its payments for poultry sold and delivered totaling $1.2 million. Lamex, among other actions, canceled ALC’s account and cashed in on a letter of credit tendered as security.
ALC sued Lamex first in local court alleging violations of Law 75. Before Lamex was served, it sued ALC in federal court naming ALC and its President as defendants. Lamex sought to recover payment of unpaid monies due and to pierce the corporate veil to hold the President personally liable. Lamex also sought a declaration that it was not a principal under Law 75, and even if it was, it had just cause to terminate the relationship.
There were mixed or contradictory signals on the record whether the court had in fact consolidated the case. After an evidentiary hearing, the District Court found for Plaintiff in all respects on its complaint except that it disallowed the request to pierce the corporate veil.
Defendant appealed and argued that the court erred in consolidating the preliminary injunction hearing with a bench trial on the merits. The First Circuit accepted, without deciding, an argument for the present case that Law 75 actions are essentially legal to which the Seventh Amendment attaches. Despite Defendant’s counsel’s failure to object to consolidation, the First Circuit held that the court’s failure to give unequivocal and adequate prior notice did not comply with the heavy burden to show a waiver of the constitutional right to a jury trial.
Thus, the court vacated the judgment with respect to the claims for declaratory relief and to pierce the corporate veil and remanded the action for further proceedings. Significantly, because Defendant conceded the amount and existence of the debt owed to Plaintiff, it affirmed the court’s monetary judgment in Plaintiff’s favor. As to the appeal from a discovery sanction, the court affirmed the court’s imposition of sanctions against Defendant for its President’s evasive and non-responsive answers during his deposition.
Plaintiff Lamex is a Minnesota corporation that facilitates the sale of food from manufacturers to suppliers and vendors worldwide. Plaintiff entered into a “business relationship” where it purchased frozen chicken for resale to Defendant ALC, a Puerto Rico corporation, that supplies product to supermarkets and retailers in Puerto Rico. In 2009, after failed collection attempts, ALC fell behind in its payments for poultry sold and delivered totaling $1.2 million. Lamex, among other actions, canceled ALC’s account and cashed in on a letter of credit tendered as security.
ALC sued Lamex first in local court alleging violations of Law 75. Before Lamex was served, it sued ALC in federal court naming ALC and its President as defendants. Lamex sought to recover payment of unpaid monies due and to pierce the corporate veil to hold the President personally liable. Lamex also sought a declaration that it was not a principal under Law 75, and even if it was, it had just cause to terminate the relationship.
There were mixed or contradictory signals on the record whether the court had in fact consolidated the case. After an evidentiary hearing, the District Court found for Plaintiff in all respects on its complaint except that it disallowed the request to pierce the corporate veil.
Defendant appealed and argued that the court erred in consolidating the preliminary injunction hearing with a bench trial on the merits. The First Circuit accepted, without deciding, an argument for the present case that Law 75 actions are essentially legal to which the Seventh Amendment attaches. Despite Defendant’s counsel’s failure to object to consolidation, the First Circuit held that the court’s failure to give unequivocal and adequate prior notice did not comply with the heavy burden to show a waiver of the constitutional right to a jury trial.
Thus, the court vacated the judgment with respect to the claims for declaratory relief and to pierce the corporate veil and remanded the action for further proceedings. Significantly, because Defendant conceded the amount and existence of the debt owed to Plaintiff, it affirmed the court’s monetary judgment in Plaintiff’s favor. As to the appeal from a discovery sanction, the court affirmed the court’s imposition of sanctions against Defendant for its President’s evasive and non-responsive answers during his deposition.
Tuesday, June 28, 2011
Dealers beware: is acceptance of commissions for direct sales by supplier in contravention of exclusive distributorship agreement by itself a waiver of a breach of contract claim under Law 75?
The issue often arises when a dealer claims that payment of commissions by its principal for direct sales made by another distributor (or retailer) to its customers in the exclusive territory is proof of an exclusive distributorship. Case law in Puerto Rico is mixed on the issue. One First Circuit case holds that payment of commissions does not legally modify the terms of a clearly non-exclusive distributor agreement. Problems arise (for the supplier) when a clearly non-exclusive distributorship agreement has expired or there is no written agreement at all. In those circumstances, as in a reported federal district court case, the payment of commissions may create a genuine triable issue of fact on the existence of exclusivity. In their commercial dealings parties may contractually agree that payment of commissions is the quid pro quo or consideration for exclusive distribution rights. But, absent a contract, it is by no means settled that payment of commissions is per se proof of exclusivity.
Picking up where I left off in my prior blog that common law authorities may be persuasive when interpreting Law 75, at least in the State of Ohio, an appellate court (but reversed on other grounds) held that payment of commissions is a waiver of a breach of contract claim. In Miller v. Wikel Manufacturing Company, 545 N.E. 2d 76 (Ohio 1989), a jury found that a principal had impaired and terminated an exclusive distributorship agreement and awarded damages of $1.5 million for breach of contract.
On the relevant issue, the appellate court reversed the verdict and reasoned:
“It was proven at trial that the Millers [the distributor] had been aware of direct sales by Wikel Mfg. [the principal] in Michigan since 1971 and that the Millers had accepted commissions on these sales. Such sales were in contravention of the exclusive distributorship contract. The court of appeals reasoned that the Millers’ election to continue as Wikel Mfg’s distributor, notwithstanding Wikel Mfg’s actions, constituted a waiver of their rights under the agreement, and thus, that they were estopped from asserting a breach of contract claim on this basis.” See 1998 WL 62980 Ohio App. 1988, citing, Section 683 of Williston on Contracts (“….where a contract is breached in the course of its performance, the injured party has a choice presented to him of continuing the contract or refusing to go on.”), reversed on other grounds, 545 N.E. 2d 76.
These facts depict a scenario of “willful blindness”, “deliberate acquiescence”, or “laches” by a distributor who has knowledge of the breach for years but elects to continue the relationship receiving benefits under the contract in exchange for additional consideration consisting of commissions. Unless the dealer protects itself with contractual language to ensure that the commissions do not novate (or affirmatively ratify) existing exclusive rights, there is a risk of waiver or estoppel from accepting commissions in the face of a clearly exclusive contract.
Right or wrong, this is all dicta as the appellate court’s holding never became law of the case. The Supreme Court of Ohio did not reach the waiver issue on the merits for it reversed the appellate court, reinstated the verdict, and held that waiver and estoppel are affirmative defenses which were waived in the case. Thus, the appellate court erred in raising the issue sua sponte.
Picking up where I left off in my prior blog that common law authorities may be persuasive when interpreting Law 75, at least in the State of Ohio, an appellate court (but reversed on other grounds) held that payment of commissions is a waiver of a breach of contract claim. In Miller v. Wikel Manufacturing Company, 545 N.E. 2d 76 (Ohio 1989), a jury found that a principal had impaired and terminated an exclusive distributorship agreement and awarded damages of $1.5 million for breach of contract.
On the relevant issue, the appellate court reversed the verdict and reasoned:
“It was proven at trial that the Millers [the distributor] had been aware of direct sales by Wikel Mfg. [the principal] in Michigan since 1971 and that the Millers had accepted commissions on these sales. Such sales were in contravention of the exclusive distributorship contract. The court of appeals reasoned that the Millers’ election to continue as Wikel Mfg’s distributor, notwithstanding Wikel Mfg’s actions, constituted a waiver of their rights under the agreement, and thus, that they were estopped from asserting a breach of contract claim on this basis.” See 1998 WL 62980 Ohio App. 1988, citing, Section 683 of Williston on Contracts (“….where a contract is breached in the course of its performance, the injured party has a choice presented to him of continuing the contract or refusing to go on.”), reversed on other grounds, 545 N.E. 2d 76.
These facts depict a scenario of “willful blindness”, “deliberate acquiescence”, or “laches” by a distributor who has knowledge of the breach for years but elects to continue the relationship receiving benefits under the contract in exchange for additional consideration consisting of commissions. Unless the dealer protects itself with contractual language to ensure that the commissions do not novate (or affirmatively ratify) existing exclusive rights, there is a risk of waiver or estoppel from accepting commissions in the face of a clearly exclusive contract.
Right or wrong, this is all dicta as the appellate court’s holding never became law of the case. The Supreme Court of Ohio did not reach the waiver issue on the merits for it reversed the appellate court, reinstated the verdict, and held that waiver and estoppel are affirmative defenses which were waived in the case. Thus, the appellate court erred in raising the issue sua sponte.
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