One on one interview with Mr. José Arturo Alvarez, President of Méndez & Co. Inc., a leader in the distribution industry

The blog has a fresh focus. Besides analyzing legal developments, I will also report the perspective of business leaders in the distribution industry whose views should be important to comprehend the impact of government regulation and market realities in Puerto Rico. The goal is to convey the collective sentiment of business leaders and trade organizations whose views may be lost in the coverage afforded by traditional media.

This is the first of a series of periodic one on one chats with industry leaders in Puerto Rico about market conditions, challenges and opportunities that lie ahead for the distribution industry. The author’s first exclusive interview was with Mr. José Arturo Alvarez, President of Méndez & Co. Inc., a company founded in 1912 and one of the leading food, beer and liquor distributors in Puerto Rico.

RFC. How do you see the state of the distribution industry in Puerto Rico at the moment? JAA. “It is challenging and highly competitive. There is pressure to be more efficient and to reduce operating costs. I do not see significant growth in the demand for food products and the market is showing signs of decline. There are more supermarkets that are necessary to meet demand. Factors contributing to a slowdown in the industry include migration (there are less mouths to feed), high operational costs to run the business, a local government imposing more tax burdens, permits, regulations and oversight, and a generalized feeling of malaise in the population.”

RFC. What effect would the implementation of a value added tax (IVA) have in the distribution industry? JAA. “An IVA would impose on the distributor the obligation to collect the tax on the product at the port of entry and pay the tax to the authorities before the product is sold to the consumer. During the period of time it takes for the distributor to claim and receive a tax credit, the distributor ends up financing the sale to the tune of at least 7%. The effect is an increase in the distributor’s receivables and this has a negative impact on cash flow.”

RFC. There’s a lot of talk about the “furgonazo” e.g., the fee of roughly $70 imposed on each container shipped to our shores. What is your view about that? JAA. “This is a surcharge imposed supposedly to inspect containers in order to detect the illegal trafficking of weapons and drugs. Thing is, of the thousands of containers that are shipped to P.R. each year, only one that I am aware of has been found in violation and that was because the federal government alerted the local authorities. A federal court in part decided that it was unreasonable to collect a fee for containers that have never been inspected as well as for break bulk cargo. My view is that the surcharge is unreasonable as an added cost which at the end of the day is passed on down the chain to consumers and is ineffective for the intended purpose. This is another example of sunken or hidden costs that add to the cost of business and to the price for goods and services.”

RFC. There’s also litigation about the “patente nacional” or the tax imposed on gross receipts. Does this tax have a disproportionate impact on the retail and distribution sector and if so, why? JAA. “It does cause more impact to the food industry because the profit margins for food products are generally lower. Because the margins are low and the tax is imposed on gross receipts, I am aware of studies where businesses accounting for 40% of the volume in the food industry in P.R. will see their effective tax rates jump to over 80%. This will inevitably lead to more bankruptcies. While a court validated the constitutionality of the tax, the trial court determined that the Secretary of the Treasury had to regulate the practice of granting tax waivers. What the Secretary has done is to determine that businesses whose gross profits exceed 6.66% will not be able to claim any waivers. It remains to be seen if that’s arbitrary or not and if the “patente” itself is fair for our industry.”

RFC. How important is the federal assistance program subsidy (PAN) to the consumption of food products in P.R.? JAA. “Very important. Every year the federal Department of Agriculture transfers roughly $2 billion to the P.R. Department of the Family for appropriations to persons in need. 25% of the allocated amount can be used by consumers as cash to purchase items in supermarkets that are not strictly food. The 25% cash allocation should continue until 2017 but studies are underway to determine if the allocation serves the public good. It is not that the total subsidy will change; it is whether consumers will be able to use 25% in cash to purchase non-food items.”

RFC. There are critics who say that distributors are intermediaries that make products and services more expensive to consumers. What would you say to those critics in terms of the value that an efficient distributor can add the sale of products and services? JAA. “For distributors to remain in business, they have to provide relevant services. Those include: adequate warehousing, storage and inventory of products, support marketing and advertising efforts, distribute the product down the trade to the ultimate point of sale, make sure that there’s sufficient product in the shelves, rotate and inspect for damaged goods, assume those costs of merchandising, deal with our clients- the retailers, do collections etc. There’s a reason for why our customers continue to buy from us and use our services, and that is, we provide relevant services for them.”

RFC. What is the future of Law 75? JAA. “It has served distributors and the market well. I hope it continues in effect.”

RFC. How is Méndez & Co. prepared to meet the challenges that lie ahead? JAA. “First, by being more efficient and reduce costs. Second, by maximizing the use and capacity of our physical facilities. Third, by continuing to serve our lines well and look for new lines. For instance, there are a number of multinationals with direct sale and marketing operations in P.R. that I believe would be more efficient in our hands. Our structure allows us to maximize the distribution, logistics and reduce costs. Fourth, by being in the forefront to embrace new technologies so that our employees can provide utmost service.”

The tide is turning and our local civil courts are making great strides

Our local courts are making significant progress in the efficient administration of justice in civil cases. Speaking as a civil practitioner, I’ve been one to say and still do that the federal district court in Puerto Rico is efficient and produces consistently uniform and predictable outcomes. Despite the “specter” of a jury, a stateside or foreign defendant would invariably prefer to litigate in the federal court if it had a choice of forum. Our federal judiciary is top notch and judicial review in the First Circuit stands as a reliable safety net to correct legal errors in the court below. And, lifetime appointments are designed to guarantee judicial independence in the decision-making process.

But, over the last ten years, the federal bench in Puerto Rico has been swamped by multi-defendant criminal cases which, adding to budget constraints, have created a backlog in the resolution of civil cases. Dispositive motions in federal court may stand submitted for six months or more without a ruling. Dispositive motions are rarely heard for oral argument and the pretrial conference may be the only or the final resting place to argue motions. Jury trials are two or three years down the road, if not more. To be sure, experiences vary depending on the judge and the complexity of the case. There is an increasing pressure to mediate and settle cases or to consent to the jurisdiction of U.S. Magistrate Judges. That is fine to deal with heavy caseloads but may not be the best or most effective solution for a litigant that needs emergency relief to save its business.

Should a party needing emergency relief go to federal court or try our local courts? My “default or automatic setting” primarily for the defense had been a preference for the federal court at least in Law 75 cases. But if you represent a client who is a dealer in a Law 75 case or a sales representative in a Law 21 case, think twice, for the local courts may be your best option, even without the right to trial by jury. If a dealer needs emergency or equitable relief, the local court, specially in San Juan, may be your best option. The defendant could benefit from an expedited proceeding too.

The Court of First Instance in San Juan has two civil trial judges assigned solely to hear requests for equitable relief, such as injunctions, mandamus etc. These experienced civil judges have become specialized in matters that require urgent and immediate attention. There is no room for delay. Just this month, it is commendable that our local judiciary implemented an electronic filing system for the special emergency courts which should expedite the filings and make litigation more cost effective. Although the civil dockets of the judges in the emergency court are huge and they lack the resources that federal judges have with multiple law clerks and unlimited access to electronic research, the cases in these special civil local courts are being heard and resolved quickly. Dispositive motions are heard with oral arguments in which counsel for both sides are afforded an adequate opportunity to argue (not counted in minutes) and the judges are keen, prepared and ready to grill the lawyers on the facts and the law. The long-established practice endorsed by the Supreme Court of P.R. of lawyers drafting opinions and orders to assist the local court judges certainly helps to expedite resolution of disputes and make up for the limited resources that our local court judges have.

Local judges in these emergency or special civil local courts are getting things done and quickly with limited resources. There are still situations in Law 75 cases where no matter what a defendant would prefer the federal forum because there is a body of developed federal case law or there is a federal question in the pleadings.

Winds are changing. There is reason for defendants to rethink before removing a case to federal court. Our local courts can be the right forum selection for a fair, prompt, and cost effective resolution of commercial disputes.