Federal district court awards summary judgment to principal in Law 75 case, in part, because distributor did not put money and legwork in the brand

In M30 Brands, LLC v. Riceland Foods, Inc., 2020 WL 6084138 (D.P.R. Oct. 15, 2020), the federal court granted the principal’s MSJ to dismiss claims brought by a Puerto Rico dealer under Law 75 for termination of a distribution agreement, and partially refused to dismiss an impairment claim from alleged lost sales caused by delayed shipments. The principal was a stateside supplier of rice. The distributor sold the principal’s rice overwhelmingly in the Virgin Islands and nominally in Puerto Rico. "At its core", Law 75 prevents terminations "once the distributor has put the money and legwork to successfully establish a brand in Puerto Rico." Op. at *2. "Absent Law 75, supplier could simply yank distribution rights away...". Id. The case was a dead duck from the start. 90% of the distributor’s rice sales occurred in the Virgin Islands. The distributor sold the balance, which did not amount to much, in Puerto Rico ($31,000 in 2016 and $22,000 in 2017). It is settled that extra-territorial sales do not count for damages under Law 75. Why? Because Law 75 provides coverage when a Puerto Rico dealer develops the market and clientele for the principal's products or services with customers in Puerto Rico. It was irrelevant that the distributor’s rice products were warehoused in and passed through Puerto Rico because what counts is whether customers in Puerto Rico purchased them. Applying the Goya and Palladio line of federal cases, which is the majority view, the court held that Law 75 did not apply to sales in the Virgin Islands. With the damages termination claim mortally wounded, the court found that there was just cause for termination of the distribution agreement from an interplay of two factors: a) the principal’s uncontroverted deposition testimony that the distributor’s sales in Puerto Rico were a drop in the bucket, and b) the distributor’s undisputed failure to do anything to market the sale of rice in Puerto Rico. The court gave more weight to failure to market rather than to sales performance, the latter being a factual question especially without an integrated distribution agreement specifying performance standards or metrics. As for the impairment claim based on allegations of price discrimination and unfair competition, the court did not buy them. It was dispositive that prices were lower for bulk sales of unprocessed and unpackaged rice to certain customers but higher for sales of branded products to the distributor as permitted by the agreement. The products were not similarly situated so that the contractual relationship was unaffected by the principal’s other rice sales. There is no final judgment as the court refused to dismiss the impairment claim based on allegations of delays in shipments as the principal could not demonstrate that the distributor did not suffer damages or lost sales directly attributable to those delays. The case is alive by a thread.

Virtually, CAB remains in business during the COVID-19 pandemic

Alert to clients and friends!

During the pandemic, CAB remains open for business and is prepared to serve our clients from our homes. Before the Government of Puerto Rico announced its extension of the work at home and closure order until April 12, we announced ours to be safe. Our full-staff of attorneys and support employees stand ready and fully-equipped to manage the crisis and continue to serve our clients working remotely to provide the best service possible. Our attorneys have access to e-mail and are available to talk by cel. phone or video-conference. We are staying safe and hope you are too.

Contact us.

In a case of first impression: bankruptcy court rules that Law 75 arbitration award of damages is not part of a lender’s security interest

PRHS has won important victories in litigation and arbitration against Johnson & Johnson International and now against Banco Santander, a lender.

In Santander de Puerto Rico v. Puerto Rico Hospital Supply, Inc., ADV. PROC. No. 19-00448 (ESL), _____ B.R.____(D.P.R. April 3, 2020), the bankruptcy court for the District of Puerto Rico (Lamoutte, J.) in a thorough 25-page Opinion & Order granted the debtor’s PRHS’s motion to dismiss an adversary proceeding filed by the lender-creditor Banco Santander. Banco Santander has a security interest over the debtor’s receivables and other collateral, as specified in the instrument, to guarantee a commercial loan of $32 million.

Struck by both its principal supplier of medical products and devices Johnson & Johnson International's termination of the distribution agreements and Banco Santander's foreclosure of its security interest, PRHS filed for Chapter 11 bankruptcy. Vital for the debtor’s plan of reorganization is the estate’s claim over the million-dollar plus damages arbitration award against J&JI for its termination without just cause of a non-exclusive agreement (later confirmed by the federal district court and pending on appeal) and the ensuing claim of over $10 million for termination of the exclusive agreements pending in a parallel stayed federal case.

In the bankruptcy, the lender Santander claims that the proceeds of the arbitration award and the federal case belong to it as part of its collateral guaranteed by the security interest. In In re American Cartage, Inc., 656 F.3d 82, 88 (1st Cir. 2011), the First Circuit- itself addressing an issue of first impression under Massachusetts U.C.C. law- held that the lender’s security interest in that case did not extend over commercial tort claims. The question presented in the Santander adversary proceeding raised the same novel issues under Puerto Rico law.

First, the bankruptcy court ruled that the plain language of Law 75 creates a right of action for the tortious act of terminating a dealer’s contract. This meant that the proceeds of the arbitration award did not originate from the dealer’s performance of a contract or contract rights guaranteed by the collateral, but instead arose from a violation of tort law. Second, the Law 75 tort claim was a commercial tort claim instituted by a corporation within the meaning of Puerto Rico’s Uniform Commercial Code. As such, commercial tort claims do not fall within the meaning of accounts or intangibles in the U.C.C., and are thus, excluded from the collateral. Third, and dispositive as in In Re American Cartage, which the court found persuasive, Santander’s security interest did not specify commercial tort claims as part of its collateral. Fourth, the after-acquired damages award arose after the execution of Santander’s security agreement and the collateral instruments did not specify it, as held in In Re American Cartage.

CAB represents PRHS in the arbitration, in the federal confirmation proceeding and J&JI’s First Circuit appeal, and in the stayed federal litigation.

Commentary: What’s taking so long for judges to rule?

I’m digressing from the subject-matter of my Law 75 blog, for once in the past 11 years, to address an important and growing concern to me, and certainly to many other members of the bar. System-wide, many civil cases are languishing in our federal courts. We are now at a turning point in history where civil cases in our Puerto Rico Courts of First Instance are progressing faster than in federal court. We dwell about this topic informally, at least between lawyers, but rarely we put pencil to paper on it.

Now more than ever, an independent federal judiciary remains the last check and balance on the exercise of power by other branches of government and is the forum of choice to vindicate federal constitutional rights. This power assumes that judges will decide the cases that are brought before them and will do so reasonably promptly.

Time and again, our federal court in Puerto Rico shines in public opinion among the most trusted of institutions. The rule of law, judicial independence, and the fair and expeditious administration of justice should figure prominently in a favorable public opinion. But if judges at all levels take months or even years to decide motions and appeals, not only does this diminish the effectiveness of the judiciary as a check and balance on the abuse of power, but the public’s confidence in the rule of law is likely to be shattered.

The impact on the litigants themselves of an important motion or an appeal that remains undecided for months or years or a trial that is never heard should not be underestimated. Clients lose interest or money to continue litigating. Cases settle that should not be settled or are settled prematurely or not settled when they should be. Cases are voluntarily dismissed or abandoned. Priorities and expectations of clients change. Witnesses leave the company, their memories fade, or worse, they die. Companies are sold, closed, or go bankrupt. Individual parties may pass away without their cases ever heard. As the clock turns, the parties or their decision-makers, even lawyers, change, retire, or disappear from the action. Litigants demand answers from their attorneys and few satisfactory answers emerge to them from questions like: “why if you had to file a brief in 30 days or less and the court denied an extension of time has the court taken months or even a full presidential election cycle to decide your motion?” “When is the court going to decide?” You say, “the court is busy with many other older cases or others that have more priority or the criminal cases are taking too much time, but your motion will be listed in “Cheo”* after 6 months from the last filing, and all we can do is wait.” There is, of course, no federal or local rule of civil or appellate procedure obligating judges to decide motions within a date certain. But still, parties need and deserve prompt rulings.

Rights are not vindicated during a march that becomes eternal to judicial finality. The often-repeated motto rings true: “justice delayed is justice denied.” In 1986, then U.S. District Court Judge Hon. José A Fusté, who himself made his career in private practice, impressed upon me as his first law clerk about the importance of working diligently and overtime as he implemented his rocket docket to bring down a case load of over 550 cases with multi-party criminal prosecutions. Many judges then and now share the same strong work ethic day in and out.

As far as moving the wheels of justice, I have learned that a judicial opinion does not have to be in every case lengthy or perfect according to the Oxford Dictionary or the Blue Book or written for publication every time, but it should be the best effort to apply the law to the facts, expeditiously. When we, as litigants, start thinking about mandamus relief or filing informative motions that try to be creative with every topic imaginable to update the record just to reappear as a blip in the court’s radar screen, you share your client’s frustration that the case has been sitting for far too long.

A swift remedy in any form, be it in a lengthy published decision, a line order, or a bench ruling, serves well both the expectations of the parties and the administration of justice. This is essential for preserving the rule of law.*
__________
* "Cheo" has been colloquially-speaking known over the past 30 years as a list or report that federal district judges in Puerto Rico are required to submit to the First Circuit Court of Appeals under the Civil Justice Reform Act of 1990 describing all the motions that have been submitted for 180 days or more without a ruling or cases over 3 years old that have not been resolved to judgment. There is no private right of action for a violation of the CJRA. Those CJRA lists should be available to the public in the Federal Judicial Center's web-site. "Cheo" comes from the saying in Spanish: "estás en las páginas de Cheo" which roughly means "you are on a watch list."

* This piece will be republished in the Newsletter of the Puerto Rico Chapter of the FBA.

Potential for disparate results in the application of Law 75 in different U.S. jurisdictions

I’ve been writing for some time that, what parties stipulate in a contract matters, particularly forum and choice of law provisions in the event of disputes or litigation. In fact, this can be outcome determinative in many cases.

For stateside suppliers, the standard protocol should be an integrated written agreement with stateside choice of law provisions to the exclusion of Puerto Rico law and arbitration with both a locale and arbitrator selection in a state or dispute resolution in a state or federal court. What arbitration does is that it adds finality to the award. If the arbitrator gets it right or wrong, the parties have to live with that result. But the reward that a stateside arbitrator may enforce the contract and apply U.S. state law excluding Law 75, a decision that would generally be final under the FAA, is sufficiently attractive for suppliers to insist on those types of provisions in their dealer agreements. As the First Circuit ruled recently in a case, challenging an award under the FAA is figuratively “like climbing Mount Everest.” Dealers can and should be expected to resist this during contractual negotiations.

For Puerto Rico dealers, the standard protocol should be no written contract at all (this approach carries some uncertainty and risks) or if there’s a written contract requirement, apply Puerto Rico law to the exclusion of other laws and dispute resolution in Puerto Rico courts. For Puerto Rico dealers, arbitration is not necessarily an option that should be off the table as long as the arbitrator is selected from a list of Puerto Rico arbitrators, is required to apply Puerto Rico substantive law to the agreement or its termination, and the locale of the arbitration is in Puerto Rico.

There is no uniformity in U.S. state law on the question whether a choice of law provision in a dealer agreement selecting state law without regards to conflict of law rules will apply or exclude Puerto Rico law as a matter of public policy. Some states will apply Puerto Rico law and override state law because that state’s choice of law rules, patterned after the Restatement on Conflict of Laws, require applying the law of the state or territory that is vested with public policy. On the other hand, other states will honor the selected choice of law clause regardless of the public policy of another state, though there are exceptions for fraud or tort claims (on plain statutory language, a violation of Law 75 is a tort). When you add an arbitrator and not a court as the decision-maker on the question of what law applies, this adds another level of highly deferential scrutiny or finality to such determinations because the Federal Arbitration Act’s main policy is to enforce arbitration awards as written.

In Premium Tire v. Cooper Tire Company, AAA CASE No. 01-18-0002-4469, a single arbitrator in an arbitration supervised by the AAA in Ohio ruled that Law 75 applied to override an Ohio choice of law provision included within an arbitration provision in the dealer agreement because the termination claim alleged in the dealer’s counterclaim had a significant connection to Puerto Rico and Ohio choice of law rules required the application of Puerto Rico law to the arbitration proceedings as a matter of public policy. This is an example where state law directs the application of Law 75.But that may not be the case in other more business-friendly jurisdictions, like New York and Delaware, where freedom of contract overrides the public policy of other states or territories.

In the circumstances of the Ohio arbitration, a Puerto Rico court would probably also disregard the stateside choice of law provision, if it allows for termination of a dealer’s contract without just cause, because Law 75 expressly provides that such a waiver of Law 75 rights is illegal as a matter of public policy. Further, the FAA’s pro-arbitration policy does not compel an arbitrator to apply foreign law regardless of Law 75’s public policy. The FAA does not enlarge or subtract from the substantive rights of the parties, but enforces the agreement to arbitrate. The validity of contractual provisions is determined by state or Puerto Rico law, not the FAA. The FAA does not validate, without more, a choice of law provision included within an arbitration agreement simply because the FAA’s policy is to enforce the arbitration agreement as written.

Where the parties do not select Puerto Rico law expressly as the applicable law governing their agreements or choose to apply a state choice of law to a dealer’s contract that otherwise would be governed by Law 75, there is a potential for legal uncertainty and what substantive law governs can vary depending on the intricacies of different state laws.

Pick your state law wisely.

Preview of program interview in MEGA-TV showcasing Law 75 as a means for economic development

Mega-TV, a television producer in Florida and Puerto Rico, will soon broadcast a program "Profesionales de Primera" showcasing professionals in their fields (doctors, lawyers, and educators), describing their career trajectories. In my case, I tried to give a perspective about laws in Puerto Rico that protect entrepreneurs after they create a favorable market and clientele for the distribution of the products or services of manufacturers or suppliers.

The subject is relevant and important considering that the service and distribution industry in Puerto Rico accounts for roughly 20% of Puerto Rico's GDP. It cannot be ignored that, while federal grants or tax breaks to Puerto Rico have become politically unpalatable to some as means for our economic development, we have laws in our books that when used and properly applied can and should promote economic activity. In broad strokes, the upcoming interview will give me a chance to introduce representation statutes like Laws 75 and 21 in layman's terms to viewers in Florida and Puerto Rico as tools for entrepreneurs. I also provide practical tips to distributors and suppliers alike who have or are considering jump-starting distribution arrangements in Puerto Rico.

Excerpts of the interview in Spanish appear below:

Q. Existen leyes en PR que protegen a los empresarios en sus relaciones comerciales con los fabricantes?
Sí, la Ley 75 de 1964 protege a los distribuidores exclusivos y no-exclusivos y la Ley 21 de 1990 protege a los representantes de venta exclusivos.

Q. Porque estas leyes son importantes?
La industria de servicios y distribución aporta aproximadamente el 20% de la economía de Puerto Rico. Existen leyes en nuestros libros que estimulan el crecimiento empresarial y no dependen de la inyección de fondos federales o beneficios contributivos. Esencialmente, estas dos leyes están diseñadas para proteger al distribuidor y el representante de Puerto Rico, los cuales crean y desarrollan un mercado y clientela para los productos o servicios del principal, para que no le quiten o alteren sus derechos de representación sin justa causa o el pago de una justa compensación.

Q. Quienes están protegidos por estas leyes?
Por ejemplo, los distribuidores tradicionales que son intermediarios en la cadena de distribución entre el fabricante y la tienda en donde usted compra el producto.

Puede que también cualifiquen detallistas que venden directamente al consumidor. Aunque no lo crea, una tienda en un centro comercial que introduce o revende productos de una línea de un fabricante al consumidor, mantiene inventario, y hace promoción o mercadeo pudiera tener protección bajo la Ley 75.

Los representantes médicos que tienen exclusividad para representar productos por ventas a comisión a ciertos hospitales o proveedores médicos pudieran estar protegidos por la Ley 21.

Los franquiciados que operan franquicias pudieran estar protegidos por la Ley 75.

Q. Hay que hacer una inversión de dinero para tener la protección de estas leyes?
En las franquicias típicamente se requiere el pago de cuotas y regalías. Para un contrato de distribución, no es necesario pagar de antemano por los derechos de venta y distribución. Un distribuidor cualificado por lo general debe invertir en promoción y mercadeo para desarrollar la marca, pero no se requiere el pago de una cuota.

Q. Se necesita un acuerdo por escrito para estar protegido?
No es un requisito tener un acuerdo por escrito para cualificar como distribuidor o representante. Los acuerdos verbales son válidos y la ley cobija las relaciones establecidas cuando se compra, distribuye, y se revende la mercancía. Las relaciones comerciales pudieran estar protegidas sin la necesidad de un nombramiento verbal o por escrito.

Q. Se necesita tener exclusividad?
Para ser un distribuidor, no. La Ley 75 también protege a los distribuidores no exclusivos. Para ser un representante de ventas, sí. La Ley 21 requiere exclusividad sin definir que quiere decir.

Q. Que recomendaciones tiene usted para los distribuidores y representantes de ventas?
Puede que su negocio tenga una relación protegida por estas leyes y ni lo sepa. Si tiene un nombramiento de exclusividad o ha sido el único distribuidor o representante, es importante que lo documente por carta o contrato. La exclusividad es el activo más valioso de una empresa en la cadena de distribución.

Q. Que recomendaciones tiene para los fabricantes y manufactureros que quieren vender y distribuir productos en PR?
Asesórese. Ponga los acuerdos por escrito en un buen contrato. No se ponga a hacer negocios sin contrato.

Q. Cuales son los problemas que más usted ve en su práctica de leyes de distribución?
Hay muchos y diversos problemas, pero la mayoría son ocasionados por diferentes expectativas de negocios o problemas de comunicación entre los partes causados por la ausencia de contratos o contratos mal redactados.

Ejemplos de situaciones:
--Ventas en el territorio por otros distribuidores o ventas directas que interfieren con la exclusividad.
--Ventas por los clubes u otras tiendas nacionales, o ventas por el internet de productos que llegan a Puerto Rico.
--Cambios en los términos de pago o crédito.
--La imposición de cuotas o metas de compra o venta, sin ajustarse a las realidades del mercado de Puerto Rico.

Q. Cuáles son las consecuencias de violar estas leyes?
Pueden ser severas. Existe un remedio de interdicto provisional (“injunction”) para mantener la relación vigente mientras se dilucida el pleito. La compensación incluye la pérdida de beneficios y plusvalía, los costos del inventario y el valor de las inversiones en el negocio que no se pueden aprovechar por otras líneas. La medida de daños bajo la Ley 21 es un poco distinta ya que provee una compensación alterna basada en las ventas del representante. Sobre la Ley 75, esta dispone para el pago de honorarios de abogados y peritos si el distribuidor prevalece en el caso.