Thursday, October 23, 2014
What could be more straightforward? A mandatory arbitration clause in a written distribution agreement governed by Law 75 is enforceable despite the distributor’s alleged but unproven financial incapacity to arbitrate
A distributor of specialty pharmaceutical devices sued the manufacturer in Puerto Rico local court alleging wrongful termination and damages under Law 75. The case, Ryvelix Company v. Onset Dermatologics, Inc., 2014 WL 4924473 (D.P.R. Sept. 2014)(Cerezo, J.) got removed and defendant moved to compel arbitration pursuant to a mandatory arbitration clause in a distribution agreement requiring arbitration of “any dispute or difference.” The Law 75 claim fell within the scope of the arbitration provision.
We all should know by now the importance of federal arbitration policy to respect arbitration agreements as written and get cases out of court. So what could be the distributor’s objection to arbitration or to arbitration in New York City for that matter? For one thing, cost. Is it too costly for an allegedly financially-strapped distributor to arbitrate in a "difficult and inconvenient" forum such as New York City? The argument that arbitration may be prohibitively expensive and could deny a party access to justice finds support in dictum in Green Tree v. Randolph, 531 U.S. 79, 91 (2000). But wait, is it really less costly to litigate a case in Puerto Rico than to arbitrate in New York? The answer is, it depends, but that was legally irrelevant. The court determined that the distributor’s argument had no support in any evidence that in fact it could not afford to arbitrate. It did not end there. The distributor had another creative argument that the doctrine of rebuc sic standibus (unforeseen change of circumstances renders compliance extremely burdensome) justified excusing compliance with the arbitration provision because the principal breached the agreement. The court held that the doctrine did not apply because it is for the arbitrator to decide whether the principal had just cause to terminate the agreement. Absent proof that it was prohibitively costly to arbitrate, the doctrine did not facilitate excusing compliance with only the arbitration clause. Case dismissed without prejudice in favor of arbitration.
This case did not involve arbitration under the International Chamber of Commerce Rules which can make it very expensive to arbitrate given the administrative fees that apply depending on the amount of the claim. The larger the dollar amount of the claim the more fees the claimant would have to pay. By the fee structure of the ICC, those fees can run in the tens of thousands of dollars, not including the fees of the arbitrator. There is some authority in case law that upholds arbitration with the ICC despite the high cost to arbitrate. There is some reason for concern that the Ryvelix case may have opened the door in other situations to excuse a party from having to arbitrate if financial hardship can be established with admissible evidence.
Monday, October 20, 2014
Federal Court in Massachusetts grants to the Dunkin’ Donuts franchisor a preliminary injunction for trademark infringement and enjoins the Puerto Rico franchisees from prosecuting a subsequent federal action brought under Law 75
This case presents the interplay between federal trademark law and Law 75 and raises a jurisdictional conflict between federal courts in substantially similar cases. In Dunkin’ Donuts Franchised Restaurants LLC v. Wometco Donas Inc., 2014 WL 4542956 (D. Mass. Sept. 11, 2014), appeal pd'g, No. 14-2002 (CTA 1),the court enjoined the prosecution of a subsequently filed Law 75 federal case. The franchisor of Dunkin’ Donuts filed suit in federal court in Massachusetts for trademark infringement and breach of contract against Wometco, the franchisee of 18 stores in Puerto Rico. The complaint requested relief to enjoin the franchisees from trademark infringement and to enjoin the prosecution by franchisees of a related action for Law 75 termination damages pending in the federal court in Puerto Rico.
The crux of the case, and what provoked the termination of the franchise agreement and the resulting trademark infringement from continuing to operate the Dunkin’ retail stores without a valid license, was the franchisees’ failure to pay $190,000 in royalty and renewal fees. The franchisees alleged that termination of the franchise agreement was unjustified and violated Law 75. Defendants also alleged that the license agreement was amended by a prior verbal agreement that waived or excused collection of fees.
The court found that this argument was “not credible” and agreed with the licensor that the agreement had an integration clause that superseded any prior agreements. Thus, there was just cause under Law 75 for termination from the licensees’ breach of the payment obligation. The court concluded at the preliminary injunction stage that the termination was not arbitrary or capricious. Finding that there was irreparable harm from the licensor’s loss of control over its trademark caused by the licensees’ unauthorized use, the court granted the licensor’s request for a preliminary injunction, despite the fact that the relief would cause the closure of all Dunkin’ retail outlets in Puerto Rico.
Finally, the court exercised its discretion to enjoin prosecution of the subsequently filed and “substantially similar” federal case pending in Puerto Rico federal court (Cerezo, J.). The court noted that special circumstances would exist to warrant deviating from the first-filed federal rule where one party races to the courthouse and misleads the other or when the second lawsuit is substantially more convenient. “While Law 75 is not regularly interpreted in Massachusetts courtrooms, Puerto Rico courts have held that other jurisdictions “are fully capable of resolving claims brought under [it]” citing, BMJ Foods P.R., Inc. v. Metromedia Steakhouses Co., L.P., 562 F.Supp.2d 229, 234 (D.P.R.2008). Id. at 10. The court applied the relevant factors and held that there was no justification to depart from the first-filed rule. Thus, it enjoined the franchisees from prosecuting their Law 75 federal action in Puerto Rico.