Have Puerto Rico Laws 75 and 21 become federal laws?

Puerto Rico has been federalized but how far would that go?

Would the federal district court have original federal question jurisdiction under 28 USC Sec. 1331 over any claims brought under Puerto Rico law, including Law 75, if Puerto Rico is considered to be a territory under Congress' plenary authority?

I suppose most would argue that there is no federal question jurisdiction because even a territory can enact local laws over matters of local concern without them becoming Acts of Congress. End of story.

But, the recent position adopted by the United States in a case pending before SCOTUS (Puerto Rico v. Sanchez Valle) certainly raises questions as to whether narrow and legally permissible (or cute) distinctions can be drawn that would not have far-reaching repercussions beyond deciding whether Puerto Rico can accuse persons for the same crimes being accused by the federal goverment.

In the PR case, the Solicitor General of the US filed an amicus brief arguing that Puerto Rico is subject to Congress' plenary authority under the territorial clause of the US Constitution so that, unlike the States, Puerto Rico has no separate sovereignty for purposes of the Double Jeopardy Clause. You can argue for the next millenium that the position of the US is limited to the Double Jeopardy Clause. I don't think so and the US should not get off the hook so easily.

In effect, according to the US, the US and PR are constitutionally one and the same- with you know who- having the absolute power and control over the other. If true, then it follows that Congress can't have the cake and eat it too. Being the sovereign, all local laws enacted by Puerto Rico under the plenary authority of Congress are federal in character which could theoretically be amended or repealed by an Act of Congress. What is there to constitutionally limit Congress from repealing local laws if it has absolute authority over a territory? We are not talking about acquired fundamental rights of US citizens. That is another matter. But I don't see the 10th Amendment as a bar if Congress can do as it pleases when it comes to Puerto Rico's welfare (and benefit entitlements). And, one of the many consequences of really being a territory might be that there would be federal question jurisdiction over all "territorial" law claims. To be sure, this would require revisiting years of precedent and expanding federal jurisdiction. Take the good with the bad, but be consistent, either way.

Maybe federal civil cases will come up as a test with local "federalized" claims when there is no diversity jurisdiction. As I said, there will be many repercussions from the pending SCOTUS cases involving Puerto Rico.

Plaintiff, like Rip Van Winkle, slept on its rights and the First Circuit affirmed the dismissal of a Law 75 case on statute of limitations grounds

The reader might recall the story of Rip Van Winkle where this character drank moonshine to the point of falling asleep for roughly 20 years only to find that the American Revolution had passed, among other personally more important things. In the case before us, Quality Cleaning Products S.C. v. SCA Tissue N.A., 794 F. 3d 200 (1st Cir. 2015), a distributor of cleaning products sued the principal under Law 75 eleven years after an alleged breach of the distribution agreement. The distributor basically alleged that the principal breached the agreement by selling certain products to other distributors at reduced and preferential rates and granting price discounts to its competitors. Not surprisingly, the principal’s primary defense was that the action was time barred by Law 75’s three year statute of limitations. The district court dismissed the case as time barred and the First Circuit affirmed the judgment below.

The First Circuit’s decision has a number of interesting substantive issues regarding accrual and tolling of statutes of limitations and procedural waivers in the context of actions brought under Law 75. The first issue, whose result did not favor the distributor, was that the “continuing violation doctrine” did not apply to prevent the accrual of the Law 75 claim from the time that the distributor first became aware of the principal’s breach at least ten before filing suit. After a thoughtful and complete consideration of the issue, the court held that a federal court sitting in diversity must apply the relevant state’s statute of limitations (not federal law), including the state’s accrual rules. And, finding no authority on point under Law 75, the First Circuit predicted that the continuing violation doctrine has been largely confined to civil rights cases and Puerto Rico’s Highest Court has not applied it in contract cases. The court also found support not to apply the doctrine from the “need for expeditious resolution of commercial disputes.”

But plaintiff was not to be outdone. Plaintiff alleged that under the “discovery rule” it did not have knowledge of the breach- for reasons unknown- until 2011, but the record did not help plaintiff on this issue. The court left open the question whether the discovery rule applies in Law 75 cases. It left the issue undecided because plaintiff failed to raise the discovery rule in its opposition to the motion to dismiss but brought it only in a Rule 59(e) motion for reconsideration. But that doomed consideration of the alleged error because judicial review of a denial of the Rule 59(e) motion is for abuse of discretion, not an issue susceptible of plenary or de novo review. Finding no abuse of discretion, the court affirmed the dismissal.

What will become of Law 75 after the Krueger report? Where does the Puerto Rico Supreme Court fit in?

Those who have read the Ann Krueger report on Puerto Rico or its summary, and those of us who are attentive and affected residents of Puerto Rico or have economic interests in our shores, have reason for concern (should I say, alarm) about what is to come from Puerto Rico's endemic and historic structural problems identified in the report.

Most of the recommendations coming from the Krueger report are not new. All require hard to find political party consensus and political will. Most require U.S. Congressional or political oversight and legislation. Some of the recommendations include enacting federal bankruptcy protection for public corporations, the repeal or modification of the Jones Act, increasing local income tax and property tax collections, reducing the federal minimum wage for Puerto Rico, obtaining parity for federal welfare programs, reinstating Section 936 or similar federal tax credits, passing reforms of local labor laws and construction permits, among others.

More relevant to the subject matter of my blog, however, are business law reforms needed to make Puerto Rico's economic environment more competitive and business friendly. While the Krueger report is not too specific about the commercial legislation that can or should be revisited, it is not hard to predict that laws protecting Puerto Rico dealers and sales agents, among others, will come under the microscope as they have in the past. But before one jumps to conclusions about whether Laws 75 and 21 produce inefficiencies (or not) or contribute (or not) to public welfare, I'd like to add a factor that is far more conducive to commercial instability than is political inaction to change existing legislation.

According to the Krueger report, Puerto Rico ranks squarely in the middle of all foreign states in the world when it comes to respecting contracts. That is, 50% of all the countries have more respect for the validity and enforcement of private contracts than we do. What would those investing millions of dollars in Puerto Rico's real estate ventures and infrastructure think of this? An alarming statistic to be sure and nothing to be proud of. But why? Courts, administrative agencies, and contracting parties who sue are all responsible for this. I've reported before an increasing tendency of our local courts not to respect civil and commercial contracts as written. Under the guise of the Civil Code's disposition to ascertain the true intent of the parties, courts have used this as a license to ignore clear and unambiguous contractual terms and to reform contracts for the benefit of one of the contracting parties, usually the one who is perceived to be weaker or economically disadvantaged. But often the government itself is the beneficiary of contractual reform. This activisim or protectionism creates a spiral or doom of uncertainty and unpredictability in legal outcomes. As troublesome is the whole body of law that virtually makes private contracts worthless when contracting with the government. Estoppel and unjust enrichment doctrines do not apply, and I could go on.

The short of all this is that commercial legal reform and economic progress cannot be successful without judicial restraint and a predictable and uniform rule of law.

The Supreme Court of Puerto Rico, as the ultimate spokesman of what Puerto Rico law is, has the power if not a constitutional obligation to put an end to judicial activism in our local courts below and bring stabilty to our rule of law that is so badly needed. Maybe then we can begin to move up the "rankings" and improve our business climate to stimulate investment, create more jobs, and stop human capital from leaving Puerto Rico. Half the countries in the world are better than us at respecting contracts. What a shame.

Federal district court invalidates forum selection clause in an agreement governed by Law 21

Law 21 protects an exclusive sales representative in Puerto Rico from an unjustified termination of the agency or brokerage agreement. Law 21 is the counterpart of Law 75 (protecting dealers). As of late, courts have been all over the map on whether forum selection clauses (providing for litigation in state courts not arbitration) in agreements governed by Laws 75 or 21 violate Puerto Rico’s public policy, and are therefore, unenforceable.

In Victory Management Solutions, Inc. v. Grohe America, Inc., 2015 WL 2183148 (D.P.R. May 11, 2015)(Fusté, J.), the supplier Grohe moved to dismiss on grounds of forum non conveniens (not for failure to state a claim under Rule 12(b)(6)). Grohe alleged that the Law 21 claim for alleged wrongful termination of contract fell under a mandatory forum selection clause providing for litigation in Illinois. The district court found many problems with the chosen venue which made the clause unreasonable and unenforceable under the Court’s Bremen analysis. The district court determined that the clause had no connection to the parties, the agreement, or the dispute. Grohe’s lease of a third party warehouse for storage, logistics, distribution and service support was insufficient and made it unfair for the agent to litigate in Illinois. The court also gave weight to the fact that an Illinois court would most probably apply Puerto Rico law despite a contrary choice of law clause in the agreement.

The court also held that the clause was not invalid under Law 21’s public policy. While this part of the court’s decision is dicta, it opines on an issue previously left unresolved by the First Circuit in the Rodríguez Barril case but is consistent with other decisions validating forum selection clauses in distribution agreements governed by Law 75.

Local intermediate appellate court affirms Law 75 preliminary injunction issued under Next Step

Next Step v. Bromedicon, 2014 TSPR 30 ("Next Step") continues to produce different outcomes in the local trial courts and this could be explained by the different facts and circumstances or the equities of each case. What provides food for thought is that Next Step is tilting the balance in favor of a distributor's choice to sue in the local courts, as opposed to the federal court, when obtaining a preliminary injunction would be vital to ensure the survival of the distributor's business. One of the reasons for this is that, under Rule 65 of the Federal Rules of Civil Procedure, a federal court may not issue a preliminary injunction without proof that the traditional requirements for injunctive relief have been satisfied, which include proof of irreparable harm and likelihood of success on the merits. Next Step holds that the traditional requirements for injunctive relief are not mandatory for a statutory Law 75 injunction. It is debatable whether the statutory remedy of a preliminary injunction under Law 75 can override the norm that federal law controls matters of procedure even where the substantive law of the forum state supplies the rule of decision. The prospect that a preliminary injunction can be legally harder to obtain in federal court tilts the balance in favor of a distributor filing the action in the local court and the defendant removing the case to federal court.

In a recent case, Novavit, a Florida corporation engaged in the business of manufacturing and supplying “natural products”, executed an exclusive distribution agreement with Life Energy Inc., a Puerto Rico distributor. A few years into the relationship, the distributor complained that the supplier was not providing client leads for new business and was breaching the agreement by selling the products in the exclusive territory through another entity. What broke the proverbial camel’s back was that the supplier terminated the agreement because the distributor was selling products through the internet and had not made any purchases during a two month period. The distributor maintained that the agreement did not prohibit internet sales.

The distributor sued the supplier under Law 75 and requested preliminary injunctive relief to preserve the status quo. Life Energy Corp. v. Novavit, Inc. 2015 WL 1538250 (Feb. 25, 2015). After an evidentiary hearing, the trial court in San Juan (Hon. Angel Pagán) entered a preliminary injunction. On appeal, the supplier raised only two issues: 1) that the trial court erred by not dismissing the complaint against the individual defendants, and 2) that the trial court erred in concluding that the contract was amended to permit internet sales.

As to the first issue, the court held that it was waived as law of the case. The trial court had denied a motion for summary judgment on that same ground and the appellant had failed to file a timely appeal. Quaere, whether a denial of a motion for summary judgment becomes law of the case since review can still be had after a final judgment. What was clear, however, is that an appeal (certiorari) from a preliminary injunction does not allow interlocutory review of a prior order. As to the second issue, the court held that the trial court had not made a factual determination that the contract had been amended to permit internet sales. The injunction simply restrained the defendant from making defamatory statements against plaintiff that the products sold through the internet were false.

Citing Next Step and the legislative intent behind the “liberal” statutory remedy in Law 75, the appellate court held that the propriety of injunctive relief “depends in large measure” on whether the distributor proves prima facie that it qualifies as a protected Law 75 dealer. In the analysis, the court should consider the equities and the interests of the parties and the purposes served by the legislation. Id. at *6. The moving party has the burden to prove the damages that it would suffer if injunctive relief were to be denied, the impact to the public interest, and the reasons to enforce the agreement. According to the court, the existence of irreparable injury or the absence of just cause is not a required element for a preliminary injunction under Law 75.

The court affirmed the trial court’s order that plaintiff qualified as a Law 75 distributor and was worthy of injunctive relief in light of Next Step.

The appellate court’s decision in this case did not raise or involve a factual issue that, under Next Step, trial courts have discretion to deny injunctive relief based on any equitable defense, such as unclean hands, estoppel or laches. Next Step itself involved an order denying injunctive relief because the agreement there was non-exclusive and the scope of the remedy sought would have altered the status quo and re-written the agreement of the parties.

Are franchise agreements protected by Law 75? Is there room for Law 75 to be used as a shield in summary eviction and lender's liability cases?

One would think of a Law 75 dealer as a distributor in the ordinary meaning of the word; an entity that sells or provides services to products down the distribution chain. But, labels can be deceptive. Mom and pop stores could qualify for Law 75 protection, depending on the facts. This was the main issue in Hernandez Alonso v. Ricomini Bakery Cabo Rojo, 2013 WL 3356669 (TCA 2013), and yes, the bakery shop franchisee in that case may have Law 75 protection if it satisfies the factors in “Roberco” and progeny to distinguish between qualified dealers and other non-qualified resellers. This fact-intensive inquiry under “Roberco” does not hinge solely on the terms of the contract but requires a consideration of the nature of the commercial relationship between the parties and the obligations and rights that flow from that relationship.

This case raises interesting questions of the extent to which Law 75 can be used as a shield in summary eviction or lender's liability cases.

There, an eviction notice of the bakery shop operator led to the Law 75 lawsuit in question and to the consolidation of a separate eviction action. Plaintiff Hernández Alonso, an operator of the bakery shop, sued his franchisor-lessor, the defendant Ricomini Bakery Cabo Rojo Inc., alleging wrongful eviction and termination under Law 75 of both the franchise agreement and the lease agreement (for non-payment of rent). The trial court granted defendant’s motion for summary judgment dismissing the action. The trial court ruled that the Law 75 claim with respect to the termination of the lease agreement was “absurd” since leases are governed by the Civil Code (and presumably, summary eviction procedures would clash with preliminary injunctive relief under law 75) and Law 75 did not protect the franchise agreement as a matter of law. The trial court found that the franchise agreement in question did not have many of the attributes of Law dealerships, such as, marketing and publicity, coordination of market activities, delivery of merchandise, collections, maintaining and inventory, and the promotion and closing of sales contracts.

Not so fast, the appellate court decided in Hernandez Alonso v. Ricomini Bakery Cabo Rojo, 2013 WL 3356669 (TCA May 21, 2013). The appellate court reversed the grant of summary judgment finding that there were disputed questions of material fact on the record that required a trial. During proceedings below, the lessee deposited the rent in court and cured the default with disbursement of the payments to the lessor. The parties also mooted the request for injunctive relief by continuing with the franchise pending a judicial determination on whether Law 75 applies to the franchise agreement. As to whether Law 75 applies, the appellate court held “…we should emphasize that although the franchise agreement is not regulated in our jurisdiction, in certain circumstances it could be resolved that Law 75 applies to such contracts. The Supreme Court of Puerto Rico suggested as much in Martin’s BBQ, 178 D.P.R. 978 n. 10 (2010)…”. (translation ours).

On remand, the appellate court held that it is relevant in the Law 75 threshold inquiry not only the language of the agreement but also oral testimony and course of dealings that would reflect the full intent of the parties. “Especially, to determine what representations were made to the plaintiff, if any, that created an expectation in the continuity of the franchise, if any such representations were made to other franchisees; and if there were any agreements or practices between the parties that modified the written agreements or the initial commercial relationship.” Id at *12 (translation ours).

Author's note: This holding opens the door to an argument by the franchisee that discovery of any discriminatory or preferential treatment of other franchisees should be permitted because it can be relevant and material to the threshold issue whether it qualifies for Law 75 protection.

Law 75 is also employed or can be misused as a weapon to halt a franchisee's eviction from leased or dealer-owned premises. There is a tension, that courts have only begun to confront, between the summary eviction procedures in the civil law or procedure and the public policy interest in Law 75 to provide a preliminary injunction remedy in appropriate circumstances. Law 75 would come in as a counterclaim which is not necessarily permitted or suitable in a summary eviction proceeding.

It is also not hard to imagine that Law 75 can be interposed as a shield in lender's liability collection cases where the debtor is a franchisee or distributor and the leased or owned (and to be foreclosed) premises are vital to the functioning of the dealer's operations. During the past seven or eight years of the recession, how many foreclosures of premises operated or owned by retail franchisees have there been where the foreclosure requires or causes the termination of the franchise? This theory of Law 75 creeping in is not so farfetched and some judges are catching up to it if this case and another local appellate court case (albeit, the dissent) are any indication.