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.

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?

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.

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.

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.

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.

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.

The interplay of comparative law and Law 75: is it appropriate for guidance?

“[A] U.S. Court interpreting a federal statute or constitutional provision can look at the reasoning of a foreign or international tribunal on similar issue.” Al-Bihani v. Obama, 619 F.3d 1, 33 n. 18 (D.C. Cir. 2010)(Kavanaugh, J., concurring), citing Ruth Ginsburg, “A decent respect to the Opinions of [Human] kind”; The Value of a Comparative Perspective in Constitutional Adjudication, Address to the International Academy of Comparative Law (July 30, 2010). While foreign decisions do not rank as precedent, they can be informative and just as persuasive as reasoned law review articles or commentators on the subject matter. See, i.d.

When interpreting Law 75 it is advisable to resort to common law and civil law jurisdictions for their persuasive value. Foreign jurisdictions which can be persuasive include Spain, Cuba and the Dominican Republic, the last two have statutes similar and preceding ours. But common law jurisdictions have also shaped many of the amendments to the presumptions of lack of just cause in Law 75, including California, Colorado, Florida, Georgia, Illinois, Indiana, Kentucky, Maine, Massachusetts, Mississippi, North Carolina, Nevada, New Hampshire, New Jersey, New Mexico, Ohio, Rhode Island, South Carolina, Tennessee, Texas, Vermont, and possibly, Wisconsin. See Report of the Chamber of Commerce of Puerto Rico, P. of C. 774, at 3, April 23, 1986; Report of the Chamber of Commerce of Puerto Rico, P. of. C. 774, at 4 May 10, 1998.

Delaware enacted a “Franchise Security Law” on July 8, 1970 protecting certain franchisees with a place of business within the state from unjustified terminations. Damages include lost profits and loss of goodwill. “[Delaware law], within the ambit of legislation in the United States, is closest in its focus to Law 75.” See 97-page Study about Law 75 of 1964, Chamber of Commerce of Puerto Rico (undated)(translation ours).

In future blogs, I will comment about noteworthy state and foreign decisions which may be helpful to resolve open issues under Law 75.

Law 75 protects dealers who develop the “market” in Puerto Rico. But, does the “market” include federal military installations, cruise ships, or duty free shops?

There are two elements for Law 75 to apply, prima facie, first, the statute protects a Puerto Rico dealer, and who qualifies as a dealer is a highly factual question; second, the business activities of the dealer must be directed to promote the sale or service of the principal’s products or services within the Puerto Rico market. Thus, the statute does not extend coverage to stateside or foreign distributors at least to those that have no sales or distribution offices or operations within Puerto Rico. Nor should Law 75 have an extraterritorial reach for sales made outside of the Puerto Rico territory. Accordingly, the measure of damages in Law 75 should not include any sales made by a Puerto Rico distributor outside the Puerto Rico market. That should be straightforward enough.

But, what is the market within the geographic boundaries of Puerto Rico that is covered by Law 75? Plain language of Law 75 does not help to answer that question. Are sales made to federal military customers within federal military installations in Puerto Rico covered? In Patterson v. Ford Motor, 931 F. Supp. 98, 102 (D.P.R. 1996), the issue was raised but the court did not answer the question ruling instead that Plaintiff, a sales representative, did not qualify as a Law 75 dealer. Would sales made by Puerto Rico distributors to cruise ships that dock within Puerto Rico’s territorial waters be covered by Law 75? Are duty free sales at the LMM international airport covered? Does the answer to these questions turn on constitutional or quasi-political definitions of what is a “territory”? If that’s the right test then arguably sales to U.S military installations within Puerto Rico may not be covered. Or does the answer turn instead on the practical import of who is the ultimate consumer for the products (understanding that many but not all consumers are Puerto Rico residents) and what benefits does the principal derive from sales by Puerto Rican distributors to these outlets (military bases, cruise ships, and duty free shops) all of which have a nexus to Puerto Rico? Either way there is no definitive answer on point in the case law to these questions.

Puerto Rico distributors: beware of ICC arbitration clauses in distribution agreements

International arbitrations are a common ADR procedure to resolve commercial disputes, including Law 75 actions. There are many reasons to choose arbitration: no jury trial…the blessing of Supreme Court precedent and FAA preemption, a panel of experienced professionals, and presumably a quicker and more cost effective mechanism etc. It is no secret, however, that arbitration can be expensive, and often more so than court cases, but rarely do the parties foresee, at the time of contracting, the substantial costs and fees that must be advanced by the claimant to initiate an international arbitration.

For arbitrations under the International Chamber of Commerce (ICC), for example, the initiating party, which may be the aggrieved distributor, must advance up front the administrative fees to cover the expenses of the ICC and the arbitrator(s). When those fees approach 10% of the face amount of the distributor’s claim, well if you do the math, those fees can be substantial just to get “your day in court”.

So far, at least in commercial disputes, courts have been reluctant to invalidate ICC arbitration clauses as substantively unconscionable because of the substantial costs to arbitrate the dispute. Kam-Ko Bio-Pharm v. Mayne Pharma, 560 F. 3d 935 (9th Cir. 2009), citing, Green Tree Fin. V. Randolph, 531 U.S. 79 (2000).

Would Puerto Rico Law 75 override a Delaware choice of law clause?

A series of published federal cases hold that Puerto Rico Law 75 displaces contractual choice of law clauses of certain common law jurisdictions in distribution agreements, notably New York (among others). Many of those cases have applied the Restatement of Conflict of Laws to conclude that Law 75 is vested with public policy and Puerto Rico has a significantly greater interest in applying its laws over the transaction. Would the result be the same in all common law jurisdictions?

When drafting distribution agreements one should consider the possibility that not all States would necessarily enforce Law 75 and override a freely-executed choice of law clause. There are States which hold themselves out as having a body of fair and efficient substantive commercial laws that offer uniformity and predictability to business actors. The State of Delaware is one of those jurisdictions with a choice of law enactment that values the parties’ freedom of contract. 6 Del. C. Sec. 2708 (a)(2005) provides that: “[t]he parties to any contract, agreement or other undertaking, contingent or otherwise, may agree in writing that the contract, agreement or other undertaking shall be governed by or construed under the laws of this State, without regard to principles of conflict of laws, or that the laws of this State shall govern, in whole or in part, any or all of their rights, remedies, liabilities, powers and duties if the parties, either as provided by law or in the manner specified in such writing are, (i) subject to the jurisdiction of the courts of, or arbitration in, Delaware and, (ii) may be served with legal process. The foregoing shall conclusively be presumed to be a significant, material and reasonable relationship with this State and shall be enforced whether or not there are other relationships with this State.”

While Section 2708 has not been interpreted in the context of either Law 75 or franchise or distribution agreements, it applies to contracts of $100,000 or more as a matter of public policy where Delaware law has a material relationship to the transaction. As Delaware’s Court of Chancery noted in Abry Partners v. F&W Acquisition LLC, 891 A. 2d 1032, 1050 (Del. Ch. 2006), when enforcing a Delaware choice of law provision in a stock purchase agreement, “[t]o enter into a contract under Delaware law and then tell the other contracting party that the contract is unenforceable due to the public policy of another state is neither a position that tugs at the heartstrings of equity nor is it commercially reasonable.”

Some pitfalls that suppliers should avoid when doing business with distributors or representatives in Puerto Rico

Having counseled suppliers and distributors in Puerto Rico for over two decades has given me an insight of the most common pitfalls in distribution practice. The list below is by no means exhaustive and there are many variations or nuances.

First and foremost, doing business without a contract (or verbally) when combined with failing to procure timely legal advice from local counsel, is a time bomb waiting to go off. This by itself creates a host of problems to a supplier and often will land you into litigation and then at the mercy of a jury of the distributor’s peers. Having no contract exposes the supplier to claims of indefinite or exclusive contracts with open ended or ambiguous terms, among other risks.

Second, there is an assumption that many agents are not distributors when they could qualify for protection under Law 75. In Puerto Rico a number of representatives throughout the distribution chain could serve as distributors though one would not think so from their corporate form alone. For instance, some retailers could qualify as Law 75 dealers if they meet the legal standards.

Would you think that an independent retail store selling or servicing your branded products in Plaza Las Americas could claim protection as a Law 75 dealer, or an exclusive representative promoting your branded medications on a commission basis to doctors and hospitals? Would the transfer of title of products outside PR by itself exempt you from Law 75's reach? Think again.

Third, there is a misconception that PR is unique in protecting dealers when that is not necessarily so. By my last count 18 states have laws similar to PR. This misconception acts as a deterrent to many companies from doing business in PR. Opportunities are lost when all they need is the right lawyer and the right contract.

Fourth, and this is not unique to PR, time and again we see a failure to document performance issues during the course of the relationship. You may have the right contract but if the obligations are not monitored and enforced properly it is an empty piece of paper.

Fifth, mergers and acquisitions are a minefield for all parties concerned and replete with Law 75 issues which are often discovered after the fact when the successor assumes the obligations directly or appoints a new distributor to take over the distribution.

Sixth, and this relates to my first point, do not assume that if you think you have the “right contract” that it will be automatically enforced under Puerto Rico law. The most common situation is with stateside choice of law clauses in common law jurisdictions that allow termination at will of indefinite contracts. Business decisions have been made to terminate Puerto Rico distributors under the assumption that there is no obligation to renew the contract at its expiration or that no cause is required for termination. Your client may be in for a surprise. Generally, a stateside or foreign choice of law clause in a distribution agreement governed by Law 75 is unenforceable as a matter of public policy. Again, you may think you have the “right” contract and act on it when you should not.

Supplier is barred from creating obligations not specified within the four corners of an integrated distribution agreement to prove just cause under Law 75

Plaintiff, a Puerto Rico distributor, sued in federal court a stateside supplier of Florida’s Natural orange juice for termination under Law 75. Plaintiff alleged that it complied with its obligations in the one and only written distribution agreement, including with each of the annual purchase requirements. Defendant unilaterally terminated the agreement and appointed a new distributor. As an affirmative defense, Defendant alleged that Law 75 did not apply as the agreement had expired, though there were e-mails in which Defendant acknowledged that the agreement continued in effect on the same terms and conditions. Defendant also alleged that Plaintiff’s delay in submitting requests for reimbursement of marketing expenses was a ground for just cause. Plaintiff filed a motion for partial summary judgment for the court to declare that the agreement continued in effect as an integrated agreement and the Civil Code precluded extrinsic evidence of alleged side agreements or obligations to prove just cause.

In Méndez & Co. Inc. v. Citrus World Inc., 2011 WL 1362468 (D.P.R. March 24, 2011)(Fusté, J.), the federal court sided with Plaintiff and granted its motion for partial summary judgment. The court held that Plaintiff qualified for protection as a Law 75 dealer, and found that the agreement was clear and unambiguous. The court held that, with or without the integration clause, under the Civil Code Defendant was barred from introducing any evidence to prove that Plaintiff had an obligation not specified in the contract to “submit annual marketing plans and budgets…to receive reimbursements of marketing expenses.” This had the effect of precluding an argument at trial that Plaintiff’s alleged failure to submit the required documentation to receive reimbursements (even if the party prejudiced by that failure would have been the distributor) could be grounds for just cause. The parties agreed to mediation. The case is scheduled for trial on May 9, 2011.

Note: the author’s law firm represents Plaintiff in the case.

Federal Court refuses to compel arbitration of claim ostensibly brought under Law 21

This is yet another case underscoring the risks and liabilities to a principal of doing business with an expired contract.

In a case with an unusual set of facts, in Gonzalez v. Hurley International Inc., 2011 WL 445833 (D.P.R. Feb. 9, 2011)(Casellas, J.), Plaintiff, a sales representative, successfully defeated a motion to compel arbitration convincing the court that her written agreement had expired, was not renewed in writing, and there was no written obligation to arbitrate.

Plaintiff filed suit under Law 21 claiming that she was an exclusive sales representative and Defendant had terminated the agreement without just cause. Plaintiff also alleged that, from a course of dealings, a new and exclusive sales representative agreement arose after expiration of the old contract. The expired agreement had a choice of law clause providing for California law and arbitration in California.

Defendant moved to compel arbitration and responded that the parties continued doing business under the same terms and conditions of the expired agreement. If the agreement continued in effect at the time the claim arose in December 2009, noted the court, Plaintiff would not have an actionable claim under Law 21 because the agreement was expressly non-exclusive and Law 21 requires exclusivity as an element of the claim.

The court held that the agreement was extended once in writing but was not thereafter renewed. Thus, the court concluded that there was no obligation to arbitrate as the agreement expired, and distinguished Gemco v. Seiko, 623 F. Supp. 912 (D.P.R. 1985)(holding that Law 75 extends an agreement indefinitely and denying motion to stay arbitration), on grounds that the agreement at issue was never within the scope of Law 21 as the relationship was non-exclusive.

The court denied the motion to compel but set the tone for a possible motion to dismiss for failure to state an actionable Law 21 claim: “[a]lthough a business relationship between the parties apparently continued, the complaint fails to set forth sufficient facts to determine whether Plaintiff became Hurley’s exclusive sales representative.”

Note: One would have thought that the court had ample grounds to order cause as to why the complaint should not be dismissed for lack of a plausible Law 21 claim and require proof that there was an extinctive novation to create a new exclusive relationship after expiration of the agreement. While Plaintiff may be better off without arbitration, at the end, unless there is extinctive novation, her Law 21 claim may be doomed under Iqbal and Twombly Supreme Court precedent.

Federal Court enforces mandatory forum-selection clause in a distribution agreement despite Law 75’s provision that litigation outside of Puerto Rico violates public policy.

While Law 75 is a remedial law of public order, courts harmonize the interest to protect Puerto Rico distributors from unjustified terminations after they create a favorable market for the principal’s products and the competing interest behind the enforcement of forum-selection clauses that “increase convenience and predictability for business actors.” Marpor Corporation v. DFO, LLC and Denny’s Inc., No. 10-1312 (D.P.R. Dec. 2, 2010)(Perez-Gimenez, J.). In Marpor, Plaintiff, a Denny’s franchisee, brought an action to declare that the franchisor had terminated an exclusivity provision without just cause. The District Court noted that both federal and Puerto Rico courts generally enforce forum selection clauses in the absence of fraud, bad faith, or overreaching. The court found that the South Carolina forum selection clause in the agreement was mandatory, not permissive. Further, the court held that the legitimate interest of providing convenience and uniformity to business actors as to the locale for resolving their disputes outweighs Law 75’s express provision that dealer disputes must be litigated (and arbitrated) solely in Puerto Rico. Accordingly, the court granted Defendant’s Rule 12(b)(6) motion to dismiss.