Monday, February 2, 2015

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.