Twists and turns of the V. Suarez and Bacardi arbitration to validate a measure of potential damages in a sub-distribution agreement governed by Law 75

After a business relationship of five years turned sour, Bacardi and V. Suarez parted ways, but not before the sub-distributor alleged a $30mm termination claim under Law 75. A three-lawyer Panel of the AAA decided, by a 2-1 vote in a reasoned opinion, that contractual provisions to compute potential damages were valid, binding, and enforceable under Law 75. Any damages from a termination of the sub-distribution agreement, if determined to be without just cause, would be set off from the “distribution value” owned by Bacardi. Because Bacardi created the goodwill and clientele for its brands and products and the sub-distributor paid no consideration to obtain the exclusive sub-distribution rights, the parties agreed that the sub-distributor would recover compensatory damages from an unjustified termination only to the extent that its net profits on the sale and distribution of Bacardi’s products exceeded the “distribution value” at relevant times. The sub-distributor V. Suarez argued that the damages provision was null and void as a “waiver of rights” under Law 75 because of the prospect that it could recover nothing from a termination. In an opinion of first impression, the Panel sided with Bacardi. Litigation in both local and federal courts quickly followed. V. Suarez first filed a proceeding- D AC2011-2354 (402)- in Bayamon local court to invalidate the award under Puerto Rico’s arbitration statute. VSC claimed that the Panel’s majority outcome was biased and the award should also be set aside for legal error as it allegedly violates Law 75’s policy against waiver of rights. Bacardi responded with two shots: it removed the vacatur proceeding to federal court and filed a separate motion to confirm the award under Section 9 of the Federal Arbitration Act. After consolidation of the proceedings, the federal court remanded the removed case concluding that there was no complete diversity jurisdiction and applied Rule 19 to dismiss the independent proceeding to confirm the award for lack of an indispensable party. The court’s opinion is reported at V. Suarez v. Bacardi Intern., 826 F. Supp. 2d 433 (D.P.R. 2011), appeal pend’g. The court’s opinion overlooked Bacardi’s threshold argument that FRCP 81preempts the Federal Rules when the FAA establishes the procedures to confirm awards and there was complete diversity jurisdiction on the face of the motion to confirm. This novel procedural issue in the First Circuit remains pending on appeal in No. 12-1032. Meanwhile, after hearing extensive oral argument from the parties, the Court of First Instance issued on July 18, 2012 an opinion denying V. Suarez’ motion to vacate. Accordingly, it confirmed the award. The court rejected the argument that the Panel was biased simply because it ruled in Bacardi’s favor. The court further held that the FAA governed the sub-distribution agreement; that the choice of Puerto Rico substantive law provision and the incorporation of the AAA rules in the agreement were not intended to incorporate Puerto Rico’s arbitration laws and rules to review awards; that the FAA’s standard to review awards under Section 10 preempted Puerto Rico’s arbitration law or rules; the award was enforceable under Section 10 of the FAA and alternatively, it did not violate the manifest disregard standard assuming it survived the Supreme Court’s Hall Street precedent; finally and in any event, the Award was legally sound and correct. About the wisdom of the damages methodology in the agreement, Judge Sylvette A. Quinones-Mari wrote: “In this case there has been no waiver, express or implied, by the distributor protected by Law 75. Law 75 does not prohibit sophisticated parties from agreeing in advance, after exchanging financial information and negotiating extensively, to determine the distribution rights and goodwill of the principal over a brand that is recognized worldwide, with an established clientele and over which the principal has invested millions of dollars to promote and develop it.” (translation ours).