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.