Judge Richard Posner of the U.S. Court of Appeals for the Seventh Circuit speaks candidly (if not controversially) about the current economic crisis and the financial markets in the United States at the Judicial Conference for the First Circuit held on May 13-14, 2010. What’s the relevance for Law 75?

What relevance could a conference about economics by a distinguished jurist have with the regulation of dealer contracts in Puerto Rico?

I was critical in my blog recently about the position espoused by an economics professor at another judicial conference a few weeks back favoring the repeal of Law 75 because of it allegedly causes artificially high consumer prices and hampers economic progress. My criticism was that proposals to amend or repeal legislation must be substantiated with reason in the facts and sound economic analysis.

Judge Posner seems to favor the Keynesian theory that market forces act on their own to correct irregularities in the financial markets and that more (or hastily-enacted regulation) is not the right answer.

Judge Posner described three fallacies that have been named to explain the situation with the financial markets in the United States, one, that the collapse was caused by over “greedy bankers”, second, that the recession ended last fall, and third, that there is a need for more regulation. In his view, Posner opined that the financial collapse was caused by various factors, including a freeze in consumer spending, heavy debt and unequal distribution of wealth, bad monetary policy, bad regulatory policy, and bad economists.

Judge Posner pulled all the stops when he blamed top-level regulators for the current financial crisis. He blamed Congress for an inept reaction or overreaction to the crisis. All congressmen and senators, except Barney Frank, know little or nothing about economic theory, Posner said.

Posner believes that the root of the current financial crisis (and the worst recession since the 1930’s) dates back to 2001 when the Federal Reserve substantially reduced short term interest rates. This caused mortgage rates to fall. Housing prices increased. A “bubble” was formed when adjustable rate mortgages made 100% financing possible and increased artificially the demand for housing. When the bubble burst in 2004, housing prices fell and this sent millions of people who had no equity to abandon their homes they could no longer afford. The banking industry and the financial markets that had heavily invested in housing collapsed. Posner opined that the government bailout of the financial institutions was necessary to prevent a bigger crash.

Finally, Posner believes there are impediments to short term economic recovery:

---Credit remains tight.
---Housing prices remain low.
---Unemployment remains high.
---The European financial crisis (and Greece’s financial collapse) will impact the U.S. economy.
---With the value of the Euro declining, U.S exports become more expensive.
---States and Cities in the U.S. remain in precarious financial positions or are bankrupt.
---The national debt in the U.S of 8 trillion dollars continues to rise.

In short, Posner believes there is no need for the creation of new government regulatory agencies and to pass hasty regulations to address the current economic situation.

As to Law 75. The same concern applies to those that are quick to single-out Law 75 as an evil for economic development in Puerto Rico and should be repealed. To state what should be obvious, no legislation should be passed or repealed without sound and reasoned analysis.

An “epic battle” over exclusive distribution rights under Law 75 comes to a close with a stalemate: the Kellogg and B. Fernandez dispute.

The dispute generated no less than multiple published cases in the federal court in Puerto Rico, two appeals on jurisdictional issues in the U.S. Court of Appeals for the First Circuit, and related litigation in Michigan state court. The matter came to a head in B. Fernandez v. Kellogg USA, 2010 WL 376326 (Jan. 27, 2010 D.P.R.)(Gelpi, J.) where on the eve of trial the court granted and denied in part Kellogg’s motion for summary judgment and denied B. Fernandez’ motion for summary judgment. It should be disclosed to our readers that I was lead counsel for Kellogg in those cases.

Since the mid 1900’s, B. Fernandez had been, and still is, a distributor of Kellogg cereals in Puerto Rico. Since the 1960’s up to 1992, written agreements defined the commercial relationships between the parties. All the written agreements were non-exclusive. In 1992, the last written contract expired on its own terms without it being renewed or replaced by a new agreement. The relationship continued on the same terms and conditions, except that in 2003 Kellogg paid commissions to B. Fernandez for direct sales of certain Kellogg cereal products and the parties made other changes in their business dealings. B. Fernandez alleged that the relationship after 1992 became de facto exclusive as recognized by the absence of competing distributors and the payment of commissions. In 2004, B. Fernandez transferred title over the inventory of Kellogg cereals to the Puerto Rican Kellogg affiliate. The inventory repurchase agreement expressly ratified the continued validity of the non-exclusive 1992 agreement. As part of that transaction, Kellogg USA, the principal in the distribution relationship, assigned the 1992 agreement to Kellogg Caribe.

B. Fernandez filed suit claiming an impairment of exclusive rights in violation of Law 75 and fraudulent inducement of the inventory contract when Kellogg started to sell certain cereal products directly in Puerto Rico. Kellogg moved for summary judgment claiming that Law 75 did not apply retroactively to the relationship that began decades before the enactment of Law 75 in 1964, there was no extinctive novation, and there was no legal basis for a claim of fraudulent inducement. B. Fernandez moved for summary judgment for the court to declare that the relationship was exclusive.

After 15 rounds of fierce litigation, the court declared a draw. The court dismissed the fraudulent inducement claim finding it hard to believe that B. Fernandez, a sophisticated business entity assisted by counsel, could allege to have been misled into transferring the inventory. As to whether Law 75 applied or not, the issue became more complex. First, the court determined that there was a factual dispute concerning the validity of the assignment of rights in the inventory contract. Thus, the court could not give conclusive effect, without a trial, as to the representation in the inventory agreement ratifying the non-exclusive agreement of 1992 (and this would have been proof that no extinctive novation occurred). The court then concluded that it could not determine summarily that Law 75 did not apply because there was a factual dispute as to extinctive novation. Finally, the court determined that whether or not on these facts the relationship was exclusive was a triable issue for the jury. In a separate opinion, the court dismissed a Law 75 claim by CWL, an affiliate of B. Fernandez and logistics provider, for it did not qualify for protection as a dealer under Law 75 and the relationship without a fixed term was terminable at will.