P.R. Appellate Court affirms trial court’s judgment for agent in Law 21 case

In Ram-Rel, Inc. v. NCR International, Inc., 2018 WL 1941655 (TA Mar. 27, 2018), a panel of Puerto Rico’s appellate court affirmed the judgment of the Court of First Instance, San Juan Part, in favor of a sales representative after holding a bench trial and finding liability and awarding damages under Law 21, the special statute protecting sales representatives (who do not qualify for protection as Law 75 dealers).

For over 37 years, Plaintiff had served as an agent in Puerto Rico for NCR’s hardware and software computer products. In 1993, Plaintiff signed a new distribution agreement under which NCR agreed not to appoint other distributors or resellers to market the product to certain customers under specified circumstances. A claim arose after NCR sold directly the products that Plaintiff had a right to sell exclusively. And, in 2008, NCR terminated the distribution agreement.

Plaintiff’s complaint in the local court pleaded only a claim of damages and breach of contract under Law 75. The Pretrial Conference Report did not raise a Law 21 claim. During trial, the court determined that Plaintiff did not qualify as a Law 75 dealer. Based on the evidence admitted at trial, however, the court held that Plaintiff qualified for protection as a Law 21 agent and awarded the alternative compensation under Article 5 consisting of 5% of the total sales generated by the agent during 8 years prior to termination, for a total compensation of $243,319 plus taxable costs.

NCR did not contest the liability determination of lack of just cause on appeal but only the award of damages. The appellate court affirmed the judgment and the court’s rationale is significant in various respects. First, the appellate court held that Rules 42.4 and 71 of the P.R. Rules of Civil Procedure permitted the trial court to award any remedy at law permitted by the admissible evidence, including Law 21 damages that were not pleaded or requested in the Complaint and the Pretrial Conference Report.

Second, the court held that expert testimony was not required to prove the amount of damages permitted by the alternative compensation formula in Article 5 because there was admissible evidence of the total sales generated by the sales representative prior to termination.

Third, the court held that the alternative compensation formula does not require discounting any costs incurred in generating the sales, so that the calculation is based on gross sales as established by the statute. The court explained that this alternative compensation is meant to simplify the process and facilitate the agent, who lacks the resources, to be able to prove its claim.

Fourth, the court affirmed the trial court’s dismissal of the claims made by Plaintiff’s shareholders in their individual capacities and against officers or employees of the Defendant. The court reasoned that Law 21, as a special law, did not codify a right of action by or against anyone other than a sales representative against its principal.

Finally, the court affirmed the trial court’s decision to partially award taxable costs to Plaintiff as the prevailing party. Unlike Law 75 that has a special provision allowing attorney’s and expert witness fees to the dealer as prevailing party without a showing of temerity, Law 21 has no such provision, and there was no finding of temerity to award attorney’s fees against the principal in this case.

Law 75 case dismissed as a sanction for discovery abuses

In Skytec, Inc. v. Logistics Systems, Inc., 2018 WL 4372726 (D.P.R. September 12, 2018)(BJM), the dealer sued the principal for impairment under Law 75 and the principal counterclaimed both for breach of contract and implied covenant of good faith and fair dealing. The record supports multiple violations by the dealer of its discovery obligations to answer interrogatories and produce documents, including repeated missed deadlines by months and violations of court orders after warnings that failure to comply would result in severe sanctions.

The dealer's own doings fatally set it up for what was bound to happen: a dismissal of the Law 75 claims with prejudice and an entry of default on the counterclaim.

Mandatory forum selection clause in the Netherlands is held valid and enforceable to litigate Law 75 claims

In MD Distributors, Corp. v. Dutch Ophthalmic Research Center, 322 F. Supp. 3d 272 (D.P.R. 2018) (FAB), a Puerto Rico dealer sued a Dutch medical devices manufacturer in local court for termination of the dealer’s contract and damages under Law 75. The manufacturer removed the case to federal court and moved to dismiss under FRCP 12(b)(6) to enforce a forum selection clause providing for litigation in the Netherlands. After canvassing applicable federal jurisprudence and rejecting every conceivable argument that the dealer could make to escape litigation in the Netherlands, the court held that the dealer had failed to meet the “exceedingly high threshold” to invalidate the forum selection clause. Basically, the Netherlands provided an adequate forum to seek redress for the Law 75 claim. It was unlike Iran or South Korea that did not provide an adequate forum or did not recognize the validity of the claim.

The court also followed precedent in federal district court cases holding that the forum selection clause providing for litigation in a foreign country or in the States for that matter (with a connection to one of the parties or to the claims) was valid and enforceable despite Law 75’s express mandate for litigation in Puerto Rico. This aspect of the court’s ruling is more controversial as there is some authority in the Puerto Rico appellate courts invalidating a forum selection clause providing for litigation of Law 75 claims in a State (as there would be no FAA preemption issue concerning forum selection clauses within an arbitration agreement). This issue was not raised in this case and it may come up in a timely request for certification to PR’s Supreme Court.

Dealers beware! The forum selection clause in this case became part of an amended contract to the dealer's agreement. Seldom do dealers have a choice or leverage to negotiate amendments like this and face a difficult choice between a subtle or direct threat of termination or a refusal to deal if the amendment is not accepted. It should be clear by now that arbitration and forum selection clauses are amongst the few valid legal options available for manufacturers to minimize any Law 75 liability. But signing the agreement proves no solace to a dealer that eventually faces a termination and is forced to litigate its claims in a distant forum at a great cost and expense and before judges or arbitrators who have no clue about Law 75. Biting the bullet and refusing to accept a mandatory non-Puerto Rico litigation clause may be worth the business risk since that is the only real option to preserve litigation of a Law 75 claim in the local courts. This is particularly true when the manufacturer seeks to add the forum selection clause by an amendment to the established relationship. On the other hand, for the manufacturer, demanding arbitration and forum selection clauses as conditions to do business should be the standard protocol since the federal courts are more hospitable than ever to enforce the arbitration and forum selection provisions as written.

The FAA preempts Law 75 if applied to void an arbitration agreement

In Cooper Tire & Rubber Company v. Premium Tire & Parts Corp., 2018 WL 3047747 (D.P.R. June 18, 2018) (DRD), the principal sued the dealer and the individual guarantors for breach of contract and collection of monies of $736,000. The dealer counterclaimed for impairment and de facto termination of the dealer’s contract for alleged price discrimination and other unfavorable business terms and for “insidious machinations” to void the personal guarantees.

A stumbling block for the dealer’s suit in federal court was that the contract had a broad and mandatory provision compelling arbitration for arising out of or related to claims and disputes. To no avail, the dealer argued that the arbitration agreement did not apply to post-termination claims and disputes and that Law 75 rendered the arbitration agreement unenforceable.

After dissecting well-established precedent of the Supreme Court and the First Circuit, the court held that the Law 75 claims were arbitrable, the obligation to arbitrate survived termination of the dealer’s contract, and that the FAA preempted Law 75 to the extent that it nullified the arbitration agreement. Finding that it would avoid inconsistent determinations, the court stayed the claims pending arbitration against the guarantors as they were not bound by the arbitration agreement. See also Apindo Corporation v. Toschi Vignola, 2018 WL 718437 (D.P.R. January 31, 2018)(PAD)(enforcing arbitration agreement of Law 75 claim and also discussing issues of service of process and personal jurisdiction); Johnson & Johnson v. PRHS, 322 F.R.D. 439 (D.P.R. 2017)(denying principal's motion to reconsider order compelling arbitration and staying case).

What this case underscores is that, by now, a written arbitration agreement should be virtually fool-proof unless there is proof of fraud in the inducement of the arbitration agreement itself or the forum-selection provision is unreasonable as to make it unconscionable to arbitrate in a distant forum, usually in a foreign jurisdiction with little to no connection to the parties or the disputes. Even clauses compelling litigation or ADR in civilized or developed foreign countries are generally enforceable, unless the foreign state does not recognize the validity of the claim or does not provide adequate remedies (countries like Iran come to mind).