Thursday, July 11, 2019
I came across an old case decided by Judge Jaime Pieras, Antilles Carpet, Inc. v. Milliken Design Center, 26 F. Supp. 2d 345, 348-349 (D.P.R. 1998), that discusses what evidence is relevant to goodwill damages in the context of a summary judgment motion, and there’s not much case law on this subject. This case involved a Law 75 dispute between a brand-name supplier of carpets and its Puerto Rico distributor. The parties disputed who terminated or impaired the relationship (the supplier denied a termination but the court found an issue of fact). The dispute also turned contentious on damages. The supplier urged that the distributor suffered no damages because it did not lose any revenues and clients from the termination. The court disagreed with the premise of the argument (though granted the MSJ on that ground because plaintiff failed to refute those allegations) since those are not the only two factors, citing a prior decision, to the effect that damages for lost profits are measured by Section 278(b).
On goodwill, the court found that the distributor’s deposition testimony (presumably not hearsay and otherwise admissible) created an issue of fact on whether reputational damage with clients suggests a possible loss of goodwill, which is an element of damages under Law 75. The witness said: “when you go to one of your major clients and say you no longer handle Milliken [the brand name], which is a major name in the carpet industry, it affects you image wise, and that's why I thought…”. The best evidence might have been testimony by the clients themselves but in this case was absent. The court granted and denied in part the MSJ but allowed the Law 75 claim to proceed on elements of damages other than lost revenues and clientele.
Wednesday, July 10, 2019
As I reported previously, a three-member panel of the International Center for Dispute Resolution of the American Arbitration Association by majority decision (former U.S. District Court Judge José A. Fusté and Manuel San Juan, Esq.) issued a 63-page Award in favor of the distributor Puerto Rico Hospital Supply finding that Johnson & Johnson International violated Law 75 by terminating a non-exclusive distribution agreement without just cause and awarding damages, costs, and fees in excess of $1.1 million plus interest. The Panel dismissed J&JI’s counterclaim of $540,000 with prejudice. Panelist Edgardo Cartagena, Esq. dissented on the Law 75 award and concurred on the dismissal of the counterclaim.
Puerto Rico Hospital Supply filed a motion in the U.S. District Court for the District of Puerto Rico in Civil No. 17-1405 (FAB) to confirm the Award as a judgment under the FAA and attached the Panel’s majority and dissenting decisions as exhibits.
Tuesday, July 9, 2019
Can a Puerto Rico corporation state a claim for Law 75 damages when it did not make a profit or loss on the sale of the relevant products, but a non-party related corporation did?
Heartland acquired the assets worldwide of the Splenda-branded sweetener from Johnson & Johnson in an asset purchase agreement (APA). Puerto Rico Supplies had been J&J’s distributor for Splenda and other consumer products in Puerto Rico. After the APA, Heartland considered various distribution alternatives and selected Plaza Provisions, its long-standing Puerto Rico distributor, for the new Splenda product line. After Puerto Rico Supplies wrote to Heartland claiming that it had become J&J’s successor and was bound to assume its prior relationship with J&J, Heartland filed a declaratory judgment action in federal court alleging, among other things, that it never conducted any business with Puerto Rico Supplies and it was not J&J’s successor under the APA. Puerto Rico Supplies counterclaimed for Law 75 termination damages and raised a bad faith claim under Article 1802 of the Civil Code. Puerto Rico Supplies decided not to sue J&J with whom it continued to have a business relationship for non-Splenda products. Heartland v. Puerto Rico Supplies Group, Inc., 2017 WL 432694 (D.P.R. 2017) (denying Heartland's motion to dismiss alleging that Johnson & Johnson was an indispensable party) provides an overview of the factual background prior to the summary judgment motion.
Discovery revealed that Puerto Rico Supplies, during the five-year period prior to the APA, had purchased Splenda and other products from J&J without a written agreement and transferred the Splenda inventory at cost to a non-party Premium Brands, Inc., an entity related to it by common ownership. It was Premium Brands the corporation that sold and distributed Splenda to customers in Puerto Rico and reported a gain or loss on those sales in its audited financial statements and tax returns. Both corporations operated for tax purposes as a pass through to reduce the tax liability of its owner. Mid-litigation, the two corporations merged and Puerto Rico Supplies became the sole surviving entity.
Heartland moved for summary judgment arguing, among other things, that the Law 75 claim had to be dismissed for lack of damages, an essential element of the claim. Heartland argued that First Circuit precedent in the Unilever case holds that the assets of separate corporations are distinct including the value of distribution contracts, and an affiliated corporation is not a party to an agreement under Law 75 simply because of its relationship to the signatory. Under this rationale, Puerto Rico Supplies, argued Heartland, suffered no damages under Law 75 because it transferred the Splenda inventory at cost and did not report a profit on any sales. Puerto Rico Supplies responded that for equitable reasons it should be allowed to reverse-pierce the veils of the corporations and treat both as one for Law 75 purposes. Puerto Rico Supplies also argued that both corporations functioned as a single entity with Premium Brands operating as a sales arm or division. Heartland countered that neither Puerto Rico nor Delaware law recognized standing to a corporate insider to reverse-pierce a corporate veil to state a claim to derive a financial or economic benefit and that the corporate separation of each had to be respected.
The issue was fully briefed on summary judgment but remained undecided by the pretrial conference.
The undersigned was lead counsel for Heartland in the case with CAB's Carla Loubriel and Diana Perez joining as attorneys of record.
The Franchising Forum of the American Bar Association released its new edition of the Franchise Desk Book, a two-volume compendium of franchising and relationship laws in selected states and Puerto Rico. This collection provides an overview of the legal requirements and standards in franchising and distribution laws and regulations in the United States and Puerto Rico. The Puerto Rico chapter has an overview of Law 75 and interpretive case law.
This author was a contributor to the Puerto Rico law chapter of this year’s edition of the Franchise Desk Book.
Enforcement of mandatory forum selection clause generates multiple/multi-state litigation and a mandamus petition in the First Circuit
Why do Puerto Rico distributors sign agreements with foreign or stateside forum selection and choice of law clauses when the performance of the agreement will be in Puerto Rico? What suppliers are after is obvious: to minimize the exposure to risk that comes from litigating Law 75 or Law 21 claims in Puerto Rico courts or the potential exposure to substantial economic damages. Of course, many distributors- often the principal players in the market- refuse to sign non-Puerto Rico forum or law provisions in distribution agreements routinely or as a policy or practice. What distributors want to avoid should be obvious too: prevent waivers of Law 75 rights.
Other distributors go ahead and sign those types of agreements often with little to no negotiation. Three reasons come to mind as to why they do and the first two are more probable than the third: 1) distributors lack commercial leverage and bargaining power or are not well informed and those clauses, which often include ADR provisions (arbitration and mediation), are deal breakers for the suppliers; 2) distributors, like other businesses, do a risk-reward analysis and knowingly and willingly assume the risk that comes with accepting those clauses as a condition to receive a new appointment leaving the fight to challenge those provisions in a Puerto Rico court for another day, or 3) the distributor is fraudulently induced to agree to ADR or forum selection provisions under false pretenses or with provisions that are hidden in fine print or reside in the internet for their click box acceptance. The third possibility presents one of the few and rare exceptions that may legally provide grounds to invalidate those types of clauses.
What should be clear is that once a distributor agrees to a written ADR or forum selection provision it is most probably stuck with it. Let’s be realistic, the chances are virtually nil that a federal court will invalidate a mandatory forum selection clause even in an agreement governed by Law 75. Chances in a Puerto Rico local court improve somewhat depending on the court or judge, but removal to federal court is likely to nip the local court’s intervention at its bud.
The case that I’m about to brief, Vitalife, Inc. v. Omniguide, Inc., 353 F. Supp. 3d 150 (D.P.R. 2018), is a run of the mill federal case validating a mandatory forum selection clause but with a twist of mandamus. There, a U.S. supplier of medical devices terminated unilaterally a distribution agreement with a Puerto Rico distributor. The Puerto Rico distributor threatened preliminary injunctive relief under Law 75, but the supplier quickly responded with a declaratory judgment action of its own in Massachusetts federal court. The agreement had both a mandatory forum selection clause and choice of law clause of Massachusetts. Not to be outdone, the distributor responded a day later with a suit in local Puerto Rico court for Law 75 termination damages and other remedies. The supplier removed the case to federal court on diversity jurisdiction grounds and moved to dismiss or transfer the case to enforce the forum selection clause.
Here comes the rub. The federal district court denied the supplier’s dispositive motion without prejudice. It’s not clear from the opinion why. Obviously, a denial without prejudice meant that, if the action in Puerto Rico moved forward, it would have mooted the forum selection clause. The order denying without prejudice a motion to dismiss on those grounds is not appealable. In a daring and bold move, the supplier filed a petition for a writ of mandamus in the First Circuit. The First Circuit denied the writ without prejudice pending a determination on the merits of the motion to dismiss or transfer the case to Massachusetts federal court.
After settlement negotiations failed, the federal court (Besosa, J.) in a thoughtful opinion discussing the relevant Supreme Court cases, analyzed the standards to evaluate transfer motions when there is an enforceable agreement with a mandatory forum selection clause. The court found that the relevant analysis did not require an evaluation of the private interests at stake in considering whether or not to transfer the case. As the federal court in this district has uniformly held in other cases, the court determined that Law 75’s provision invalidating litigation outside Puerto Rico yields to precedent enforcing mandatory forum selection provisions. The court in a footnote made it clear that it was not passing judgment on the validity of the choice of law provision. With that, the court transferred the case putting an end to the Puerto Rico litigation. Cf. Aurora Casket Company v. Caribbean Funeral Supply Corp., 2017 WL 5633102 (D.P.R. 2017) (granting in part transfer motion and severed claims against parties not signatories to agreement with forum selection clause).
How likely or not is it that the Massachusetts federal court will apply Law 75 to the agreement or its termination? That was the risk that this distributor apparently willingly or knowingly assumed at its own peril when it signed the agreement.