Sunday, March 21, 2010

Law 75 comes under attack at a conference ….and this is not the final chapter

Last week, the Foundation of the Federal Bar Association, Puerto Rico Chapter, and the Foundation of the Historical Society of the Supreme Court of Puerto Rico sponsored a conference on Judicial Independence and Economic Development in Puerto Rico. Among the panelists were distinguished practitioners, Judge Cabranes of the U.S. Court of Appeals for the Second Circuit, and a professor of economics at the graduate school of the University of Puerto Rico. Among those attending were Justices of the Supreme Court of Puerto Rico, Judges of the U.S. District Court for the District of Puerto Rico and members of the federal bar.

The theme of the presentation was to establish a positive correlation between states and countries that have a strong and independent judiciary that values observance of the rule of law and economic development. It is not surprising, but disappointing, that such an important conference has received so far no coverage in the press.

Law 75 has come under attack almost since its inception in 1964 as a protectionist statute. Some court decisions and commentators have objected to the statute as being anti-competitive. Law 75 has thus far survived constitutional challenges under the Due Process Clause, and the Dormant Commerce clause including arguments of preemption under federal trademark and antitrust laws.

With the globalization of commerce it is hardly surprising that Law 75, as many other laws that are perceived to act as obstacles to freedom of commerce, will come up on the radar screen as it did at the conference last week. To a packed house full of lawyers, judges and possibly legislators, the economics Professor espoused the repeal of Law 75 as creating intrabrand monopolies and as harmful to economic development. The Professor concluded that Law 75 causes artificial increases in the prices of goods and services to consumers. He described an experience in Uruguay that repealed a law similar to Law 75 and stated that the Dominican Republic also repealed its dealer protection statute (an assertion which I believe may be factually erroneous). At least 18 states of the Union and many countries still have laws similar to Law 75.

When asked to provide empirical economic support for his conclusions, the Professor admitted that he had conducted no analysis, and knew of no study, that supported his conclusion that Law 75 causes or contributes to price differentials of goods and services between Puerto Rico and the continental United States. He said that the distribution industry was opposed to conducting studies as if to suggest there is something to hide. What precludes the academic world from doing the research independently is odd!

The Professor was unable to reject other plausible and independent explanations; that is, that price differentials may arise from unrelated market conditions, such as the imposition of high tax rates on both imports and the sale of goods to consumers (the exorbitant taxes to luxury vehicles are but one example), and other high fixed costs on imports (e.g., freight and insurance costs). Further, the Professor assumed that intrabrand monopolies created by exclusive distributorships are inherently pernicious to consumers when that is not necessarily so. For one thing, the antitrust laws are primarily concerned with interbrand not intrabrand competition. When a distributor prices a product or service above its competitive level, the elasticity of demand dictates that consumers will change their spending and consumption patterns toward another brand or service. That sort of explains why the pricing points at the supermarket of Coke and Pepsi, for example, are basically identical even as some consumers may stick to their brand despite price increases (up to a point). Absent collusion between manufacturers of competing brands or products, from an economics standpoint, the distributor that uses its intrabrand monopoly to reap higher profit margins will be forced by the market to lower its prices in order to remain competitive. On the other hand, exclusive distributorships help to eliminate “free-riding” by other dealers and theoretically require the exclusive dealer to do more to promote the sale of the principal’s products. And, contrary to popular belief, Law 75 protects but does not require exclusive distributorships.

Without reliable economic research, it is easy if not irresponsible for one to advocate the repeal of Law 75 as not serving the public interest. It remains to be seen if any lasting impressions have been left on the policy makers attending the conference by the facially appealing, but superficial, viewpoint of the Professor that Law 75 acts a barrier to economic development in Puerto Rico.

Saturday, March 6, 2010

Part 2: Is a constructive or de facto termination of a distribution agreement actionable under Law 75 after the Supreme Court’s decision in Mac’s Shell Service v. Shell Oil Products?

In Mac’s Shell Service v. Shell Oil Products, No. 08-240, slip op. (March 2, 2010), the Supreme Court of the United States held that a constructive termination claim was not actionable under the PMPA, the federal law protecting petroleum franchisees, unless the retailer-operator voluntarily has abandoned the franchise. The Court reasoned that both the plain language of the PMPA, and analogous federal employment law jurisprudence, do not support the First Circuit’s reasoning that a franchisor’s breach of an essential contractual term made it actionable as a constructive termination under the PMPA. The PMPA’s comprehensive scheme for compensation, including awards of punitive damages for violations, also made the Court reluctant to expand the reach of the statute for all breach of contract claims. A termination claim under the PMPA, said the Court, requires an end to the relationship of the parties. While the Court refused to federalize claims not involving a complete rupture of the business relationship, the Court held that the PMPA does not disturb state laws that provide remedies for wrongful practices, including a franchisor’s breach of contract short of termination. Thus, the Shell Oil Products decision does not foreclose claims under Puerto Rico law for de facto or constructive termination of franchise and distribution agreements.

That’s where Law 75 comes in as it was enacted to compensate for abusive practices by principals designed to appropriate the goodwill created by the Puerto Rican distributor. And, Puerto Rico’s Article 1077 of the Civil Code supplements the remedies available for resolution of contracts arising from breaches of essential and material terms.

Specifically, the type of claim that was not actionable in Shell is actionable on the face of Law 75 as it codifies a claim for impairment of contractually acquired rights and expectations short of a complete cessation of the relationship (a “menoscabo”). Moreover, Law 75’s definitions of termination without just cause and the measure of damages for termination expressly include a remedy for acts detrimental to the established relationship (“menoscabo”). Thus, from Law 75’s plain language and its interpretive case law (including a series of federal cases and the PR’s appellate court’s opinion in Maderas Alfa), a principal’s impairment of an established relationship with the distributor may operate as the functional equivalent of a termination requiring consideration of the statutory criteria for termination damages, including loss of goodwill and five-years of lost profits, among other factors. Compare Maintainco, Inc. v. Mitsubishi Caterpillar Forklift, CCH Business Franchise Guide ¶14,195 (holding that a dealer's loss of an exclusive territory, in and of itself, could qualify as a constructive termination under New Jersey’s Franchise Practices Act which, like Law 75, requires good cause for termination; affirmed the trial court’s ruling and its award of compensatory damages for lost profits to the dealer in the amount of $679,414. Additionally, the trial court's substantial award of attorney fees to the dealer in the amount of $3,533,642 was also upheld, but an award of $477,611 in expert witness fees was reversed).