Thursday, April 14, 2011

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.