Saturday, May 19, 2018
It is no exaggeration that federal civil cases in the District of Puerto Rico have stalled on their tracks by motions to dismiss (“MTD’s”), especially Rule 12(b)(6) motions that have proliferated after Iqbal/Twombly (the Supreme Court’s plausibility standard).
Generally, because the Federal Civil Rules regulate when discovery can begin, the filing of an MTD will excuse a defendant from answering the complaint and will stay discovery. For some securities cases, federal substantive law stays all discovery pending a ruling on an MTD. With the existing Federal Rules in other non-securities civil cases, an MTD will de facto stay discovery unless the court enters an order setting a Rule 26(f) conference and the parties are bound to meet and confer to stipulate a joint discovery plan. With a pending MTD and no scheduling order in sight, all discovery will be stayed pending resolution of the MTD. So, if all that happens in the case is that the defendant files an MTD and the court does not decide the motion or enter a Rule 26 order pending a decision on the MTD, the case is stayed for how long it takes the court to decide the dispositive motion.
There is colloquially-speaking a "Cheo" rule (as in "estas en las paginas de Cheo" or like you are on a watch list) that requires district judges to report to the First Circuit all motions that remain undecided for three months or longer. Compliance with the Cheo rule varies depending on the judge or the case. In our district, with the clogged criminal docket and depending on the complexity of the case, we are talking about months if not years in some cases for the court to decide an MTD. If the MTD is denied, the defendant will have to answer the complaint, and this will trigger a scheduling order, the obligation to have the Rule 26(f) meeting, and finally, discovery can begin. By then, if a long time has passed without a ruling on the MTD, memories of witnesses will fade and proof may be lost (witnesses and parties include human beings who die). Delays take the wind out of the sails of dispute resolution. Parties also lose interest in prosecuting the cases. Lawyers are usually not working on those submitted cases. Nothing good comes from nothing happening in cases, for all those concerned.
You can argue one way or the other whether it is wise or even fair to stay discovery pending a ruling on an MTD. The argument is stronger for a stay when the MTD raises an objection to subject matter or personal jurisdiction because a case cannot move forward without jurisdiction over the complaint and the parties. It is another matter entirely when the MTD raises a failure to state a claim upon which relief can be granted because the legal sufficiency of the pleadings may depend on facts which have not yet been uncovered through discovery because the information is within the defendant’s possession or control or need to be explored or developed by full discovery. Iqbal/Twombly seem to have generated an increasing number of Rule 12(b)(6) motions challenging indiscriminately the sufficiency of the allegations in pleadings without the benefit of any discovery. As I reported in my previous blog, a few recent cases in both our district and the First Circuit are gaining traction in denying Rule 12(b)(6) motions to dismiss and postponing a decision on the legal sufficiency of plausible claims until a later stage (summary judgment, for example) after the benefit of discovery.
Perhaps one solution might be for the court to enter a standing order in civil cases that a defendant has to file an answer to the complaint and start discovery while an MTD based solely on Rule 12(b)(6) grounds remains submitted for decision. One way to accommodate competing concerns about wasteful and unnecessary litigation costs and fees if the MTD were to have merit would be to apply such a standing order in every civil case unless the defendant shows cause or proves prejudice from having to conduct discovery pending the MTD. This approach is consistent with long-established Supreme Court precedent in the "Landis" case requiring a showing of prejudice by a party moving to stay a federal case. This standing order approach would minimize incentives to abuse Rule 12(b)(6) motions.
In Vilá del Corral v. D’Accord, Inc., 2017 WL 1184002 (D.P.R. March 28, 2017) (“D’Accord”) (Domínguez, J.), plaintiff filed suit for collection of unpaid commissions and injunctive relief, invoking Puerto Rico’s Sales Representative Act No. 21 (a special law modeled after Law 75). Plaintiff alleged that Defendant breached an exclusive agreement existing, for over “twenty-nine years”, that authorized him to represent D’Accord branded menswear clothing in Puerto Rico. Defendant attacked the sufficiency of the allegations under Rule 12(b)(6), Fed. R. Civ. P., arguing that “there are no contract documents” to support Plaintiff’s argument that he was an exclusive sales agent for D’Accord in Puerto Rico. Id. at *2.
The court noted that it was “unclear [from the Complaint’s allegations] whether the agreement was written or oral and whether it was later novated.” Id. at *4 n. 2. What is more, the court was “skeptical” on whether Law 21, enacted in 1990, applied retroactively to the alleged business relationship predating the enactment of Law 21, but lacked the “requisite clarity to reach a properly-founded conclusion” at the pleadings stage without the contract documents. Id. at *4 n. 3. Considering the well-established plausibility standard governing a Rule 12(b)(6) motion, the court denied the motion to dismiss holding that “Plaintiff has made a satisfactory showing of a plausible Act 21 claim, which the Court deems sufficient to level up and proceed to discovery.” Id. at *4 (quoting) Triangle Trading Co. v. Robroy Indus., 952 F. Supp. 75 (D.P.R. 1997) (Providing that determinations of whether a person is a dealer or exclusive sales representative is fact-intensive and should not be made on the pleadings).
The takeaway of the D’Accord decision is that, no matter how dubious a claim might seem on the pleadings without the benefit of full discovery, a plaintiff is not required to plead the particulars of a binding contract or establish an extinctive novation to state a plausible claim under Law 21 (or for that matter, Law 75) and survive a Rule 12(b)(6) motion to dismiss. This holding is aligned with recent First Circuit authority. APB Realty, Inc. v. Georgia-Pacific LLC, No. 17-1906 slip op. at 9 (May 7, 2018) (vacating Rule 12(b)(6) dismissal of breach of contract claim because “the complaint alleges facts from which the court can plausibly infer the making and breaking of a contract”). D’Accord applies correctly the plausibility standard governing a Rule 12(b)(6) motion to dismiss an action brought under any one of Puerto Rico’s representation statutes (Law 75 or Law 21).