Monday, September 7, 2009

Unclean hands and illegal activity won’t get you a preliminary injunction under Law 75

In Prime Wholesalers v. Fields Motorcars of Florida, 08-1640 (ADC), 2009 WL 2612519 (D.P.R. Aug. 17, 2009), Prime Wholesalers, a car retailer in Puerto Rico, sued Fields Motorcars, a Florida wholesaler, in federal court for alleged violation of Law 75. Prime moved for a preliminary injunction when Fields refused to continue selling it new BMW vehicles, which represented 90% of Prime's sales. During years of dealings, a car salesman of Fields sold new BMW cars to Prime in a scheme to deceive the manufacturer BMW that prohibited wholesalers from selling new cars to brokers or dealers except to end users. BMW NA had appointed a retailer Autogermana as the exclusive distributor in Puerto Rico (exclusive in the sense that only sold BMW vehicles). BMW NA later sought to stop the practice of unauthorized sales into the territory. Prime and Fields devised a scheme that induced BMW NA for years into believing that Fields sold the vehicles directly to customers, practices that the court found “outrageous.” Unauthorized sales by Fields to brokers or dealers would expose Fields to breach of contract in its agreement with BMW NA and a potential termination.

The court assumed, for argument, that Prime qualified as a Law 75 dealer. While Prime satisfied some of the threshold requirements to qualify for Law 75 protection, “Prime could have stopped purchasing vehicles from Fields anytime, with no negative consequences” and the court found this “extremely problematic” to qualify as a dealer.

The case turned on the court’s findings, after an evidentiary hearing, that Prime did not establish likelihood of success on the merits and irreparable harm. Fields argued that Prime could not prevail on a Law 75 claim because the underlying distribution agreement with Fields was contrary to law. The court held that an injunction would harm BMW NA’s contractual rights and would expose Fields to breach of contract so Prime could not prove likelihood of success of establishing lack of just cause. The court rejected in a footnote the argument that BMW NA's non-price restrictions violated the antitrust laws.

The court also held that Prime’s argument that 90% of its sales were derived from Fields was an economic injury which by itself was insufficient for a showing of irreparable harm. Reputation damages can also be redressed by a monetary award.

When it came to balancing the equities, the court was not too considerate either for Prime or Fields. The court found that the public interest would not favor an injunction for it “would promote and condone” both Prime’s “illicit activity” and Fields’ ”willful blindness.” A showing of Prime’s unclean hands was sufficient by itself to deny equitable injunctive relief as it did.

Editor’s note: Although a court’s findings at the preliminary injunction stage are not binding on the merits, the court’s opinion in Prime Wholesaler about a party’s inability to assert a Law 75 claim when it has participated in illicit activity has undertones that may, and should, influence the adjudication of merit issues under Law 75.

For instance, one issue that comes up frequently in Law 75 litigation is a dealer’s standing to claim actual damages for impairment or termination when it has underreported its income or overstated its expenses in the relevant tax returns or audited financial statements. Dealers have alleged that their actual damages under Law 75 are greater than the net income reported in their returns or audited statements. To be sure, there are legitimate instances where the dealer reports total company losses in its operations but is able to prove that the line was profitable. In that scenario it would not be necessarily inconsistent to claim actual damages when the company as a whole reported a loss. Courts have not been uniform when dealing with disparities between actual and “official” damages. Some courts admit the evidence under the premise that it is a credibility issue for the jury or trier of fact. This line of thinking holds that reporting a loss in the official business records does not prove that the dealer suffered no actual damages from a termination or impairment of a product line. While that may be so, it is difficult to ignore that a party may abuse the legal system as a tool to benefit from what is potentially fraudulent conduct. Other courts admit the evidence but report the dealer’s purported tax evasion to the authorities. But few, or none, disallow the claim under the notion that a party cannot recover from potentially illicit activity or should be estopped from asserting a claim under Law 75. Is it for the Legislature to add an unclean hands defense in Law 75 or for the courts to deal with this issue? The question is open for debate.