Are settlement agreements valid and enforceable under Law 75?

I’m not aware of a dealer ever challenging a written agreement after it receives the compensation it voluntarily accepted for the settlement of an actionable Law 75 claim. It is routine to settle Law 75 claims to avoid trial. It is typical for the payor (usually the principal) to require and state in a written agreement that it does not admit liability as a condition to settle and it does so to avoid the costs and inconveniences of trial. It is usual for Law 75 cases to settle for amounts that are short of the total compensation that a fact finder could potentially award the dealer in damages if there was liability, or for amounts less than the measure of full Law 75 damages. The question about the validity of settlement agreements is provoked by Law 75’s anti-waiver provision that it is a remedial legislation, and its protections cannot be waived. For example, if Law 75 applies, parties cannot waive by contract that the agreement expires at the end of the term and will not be renewed or waive just cause for termination or non-renewal. In another similar context, an agreement cannot state that it is not a dealer's or distribution contract to avoid legal protections.Those are the obvious cases. Less usual, but found by an arbitration panel not to waive Law 75 rights, is a liquidated damages provision in a Law 75 agreement in the event of a termination. But that case was factually unusual because the distribution of the line and its goodwill were fully mature, valuable, and developed by the owner when the dealer took over the distribution rights.This anti-waiver provision has never come into play in the context of a settlement agreement. I am inclined to think that a settlement agreement, that would otherwise be valid and enforceable at civil law, does not implicate Law 75’s anti-waiver provision.The dealer could be receiving less money than the maximum measure of damages, but Law 75 does not guarantee any compensation much less require a severance (“mesada”). Actual damages must be proven.The factors in Law 75 to award damages are just guidelines. Law 80, which tracks Law 75’s just cause requirement and is vested with public policy, does obligate an employer to pay the statutory severance (“mesada”) for an unjustified termination. Puerto Rico’s Supreme Court is evenly split down the middle 4-4 on the validity of a settlement agreement where the employee admits that there was just cause for termination as a condition to receive a settlement payout. Four Justices would hold that the settlement agreement of a Law 80 claim on those terms is illegal and contrary to public policy. They reason it was a waiver of the employer's burden to prove just cause for termination and bypassing payment of the compulsory "mesada". But the case should raise some eyebrows when settling claims involving special laws, like Laws 75/21, that have strong public policies behind them. The decision, Feliciano v. Luxury Hotels, 2022 TSPR 133 (Oct. 26, 2022), gives food for thought about how far reaching could this decision be in employment cases or if it is limited to the facts. Stare decisis is that settlement agreements of Law 80 claims are valid, at least for the time being.

A panel of Puerto Rico’s intermediate appellate court invalidates choice of forum provision under Law 75

In Home Orthopedics Corp. v. Rikco International, 2020 WL 3455027 (TCA 2020), an exclusive distributor of orthopedic shoes sued both its principal for termination under Law 75 and KMart for tortious interference. The supply agreement had a mandatory and broad choice of forum clause providing for resolution of disputes in Wisconsin. The trial court dismissed the complaint with prejudice to enforce the forum selection clause, relying principally on federal caselaw. It is unclear from the opinion why it was a dismissal with prejudice when enforcement of the clause only had a jurisdictional effect, not on the merits of the claims. The appellate court reversed and remanded. First, the court held that the supply agreement had expired on its own terms and was not renewed in writing. Although the parties conducted business after its expiration date without a new agreement, the court held that the there was no valid and binding choice of forum clause. Second, assuming it was in effect, Law 75 invalidates a provision mandating litigation outside of Puerto Rico as a matter of public policy. There are three things to learn or remember from this case. One, for suppliers not to do business without a written contract and be vigilant to renew or negotiate the terms of a new agreement before the old one expires. Two, there is an actual conflict between federal courts and Puerto Rico’s intermediate appellate courts on the enforcement of mandatory choice of forum provisions in Law 75 contracts. Third, an arbitration agreement with a mandatory choice of forum clause outside Puerto Rico is binding and enforceable under the Federal Arbitration Act, that preempts Law 75 on this issue. A properly crafted arbitration clause would have solved the locale for dispute resolution in this case.

Non-exclusive distributor loses preliminary injunction in federal court

Update: No. 22-1491 Argued on November 9, 2022 in the First Circuit. Appeal from an order denying a preliminary injunction. Stay tuned for a ruling. José Santiago, the largest foodservice distributor in Puerto Rico, requested a preliminary injunction under Law 75 to continue an unwritten, nonexclusive distribution contract. In José Santiago, Inc. v. Smithfield Foods, Inc., 2022 WL 2155023 (D.P.R. 2022)(Carreno, J.) the district court would not oblige. In sum, Santiago could not prove that it had exclusive distribution rights over the Smithfield product line of meats in question and was behind in its payments. Santiago was an exclusive distributor but for a different product line of the supplier’s predecessor. Santiago had an exclusive distributor agreement for Farmland, not Smithfield products, with the supplier’s predecessor. Farmland merged into an entity within the Smithfield corporate umbrella. Things went south when Smithfield informed Santiago that it intended to consolidate the brands. Under this new arrangement, Santiago would remain as the exclusive distributor for Farmland products. But, as to Smithfield, another distributor- Ballester- would continue to serve as the exclusive distributor for Smithfield. Significantly, Santiago had never been a distributor of the Smithfield product line before the consolidation. Things went even deeper south, when Smithfield later sent a notice that it was reducing its brand offerings and Farmland would be consolidated into the Smithfield brand. Santiago aspired that it would become an exclusive distributor for Smithfield products. Smithfield responded by offering Santiago a non-exclusive distributor agreement for some Smithfield products. Ballester and Santiago would remain as before the two Puerto Rico distributors for the consolidated Smithfield and Farmland lines. From going south, things reached the Antarctic. In December 2020, Smithfield sent Santiago a notice of termination of the exclusive distribution contract. Since then, Smithfield continued to supply Santiago with both Farmland and certain Smithfield products pending reaching a non-exclusive agreement. Santiago claims that Smithfield would refuse to sell unless it agreed to the non-exclusive contract. The problem for Santiago was not the law but the facts, as the court noted, that would become dispositive on whether to issue a preliminary injunction. Here are the bullets of the court’s decision denying injunctive relief. First, the court cautioned that a ruling on the injunction was not an adjudication on the merits. True as far as that goes. But once any party loses a preliminary injunction there’s a either a sweet smell of roses for the winner or a foul stench for the loser as the case moves forward on the merits. Here it was the latter. Second, the court was right that Law 75 contractual obligations need not be reduced to writing. It ruled that especially when there is no written contract the court looks to the parties’ course of dealings to discern the terms of the agreement. Citing Medina & Medina, it is not only where there is no written contract that course of dealings evidence is relevant, but the entire course of dealings is helpful to understand the business relationship and how the parties performed their obligations. Third, the court ruled that in this diversity case Puerto Rico substantive law applies to the preliminary injunction analysis. The common law (and federal standards) of irreparable injury and likelihood of success are not obligatory under Law 75, but can inform the analysis of how the court views the interests of the parties and the public policy interests at stake. Fourth, Santiago qualified as a Law 75 dealer. Fifth, and touching on the merits, the court was “skeptical”, but did not decide the question, whether Santiago had any contractual rights from Smithfield’s refusal to fill orders. Sixth, especially in the absence of a written contract, the court found no “pattern or consistency” that could be discerned from the course of dealings that would vest Santiago with rights over the Smithfield line. The problem for Santiago was that Ballester had been the only distributor of the Smithfield line before the consolidation. However, the problem that I see with the court’s analysis, from an omission in its discussion, is that Santiago did have exclusive contractual rights over Farmland products before the consolidation. The inference would have to be that Farmland was in effect completely withdrawn from the market after the consolidation with Smithfield, so that the refusal to sell were only over Santiago’s p.o’s for Smithfield that it had been selling on a non-exclusive basis without a contract. Seventh, and the final dagger in the heart, was that Santiago was behind in its payments and Smithfield was not shown to have a history of tolerating late payments. Smithfield refused to fill orders until and if Santiago became current. The court was leaning to find just cause for termination. Finally, the court found that Smithfield would also have just cause for termination after reaching a bona fide impasse in its contractual obligations, citing RW Welch. The court applied the rule existing in the context of market withdrawals. “We have seen no evidence that Smithfield’s decisions to consolidate its brands, do away with Farmland, and offer Santiago a written non-exclusive distribution contract are unreasonable or in bad faith.” The short of it was that Santiago could not aspire to have exclusivity which it never had by contract or from a course of dealings.

Federal court awards Puerto Rico dealer over $855,000 in fees and costs as prevailing party in a Law 75 case

Litigating and losing Law 75 cases come at a high price. In Casco, Inc. v. John Deere Construction, ---F. 3d---, 2022 WL 1090559 (D.P.R. Mar. 31, 2022) (P. Delgado, J.), the court applied Puerto Rico Law 75’s fee-shifting statute and awarded the prevailing party Puerto Rico dealer over $855,000 in attorney's fees, expert witness fees, and statutory costs. After a nine-day trial in 2016, a jury found for the dealer and awarded $1.7 million in damages for termination and impairment of a dealer’s contract. The First Circuit affirmed the district court’s judgment and rulings. See 990 F. 3d 1 (1st Cir. 2021). This is the first reported decision that dives into the purpose of the fee-shifting provision in Law 75 and its legislative history. The P.R. Supreme Court and the local appellate courts have not addressed a claim for fee recovery under Law 75, but rather, under Rule 44.1 which requires a showing of temerity.The federal district court observes that the fee-shifting provision of Article 7 in Law 75 is modeled after fee-shifting provisions in federal civil rights statutes. This is significant because under federal law a prevailing party plaintiff ordinarily, absent exceptional circumstances, is entitled to recovery of reasonable fees incurred in the litigation. Further, the lodestar is the accepted methodology to determine the reasonableness of the fee amount. While Article 7’s permissive language is like Section 1988 of Title VII by allowing the court discretion to award fees, an award of fees is virtually mandatory in these cases for public policy reasons. Recovery of Law 75 fees does not require a showing of temerity or bad faith. On the other hand, for a prevailing party defendant to recover its fees, the case must have been frivolous or litigated in bad faith. From this rationale, the standards for prevailing party dealers and principals are different for fee recovery in Law 75 cases as they are in civil rights cases. The court also rejected Deere’s constitutional attack to Casco’s fee recovery. Deere argued that a provision in the 1986 agreement would allow Deere not only to recover its own fees in an action to enforce a breach of contract but also its fees if it lost the case brought by the dealer. The court found the argument contractually and legally untenable. The contract only allowed fee recovery by Deere in an enforcement action by it, not if it illegally terminated the contract and lost the case filed by the dealer. Because the contract could not reasonably be read as precluding the dealer’s remedy under the fee-shifting provision enacted in 2000, there was no retroactive application of the statute because applying it would not impair any of Deere’s contractually established rights. Casco could not waive rights that did not exist when the contract was executed in 1986, said the court, in declining having to decide whether such a waiver would have been unenforceable. As most of the opinions dealing with fee awards go to great length to evaluate line by line challenges to items of fees and costs, this opinion is no exception. Highlighting only some significant rulings, the court applied First Circuit precedent in 2022 to allow fee recovery for time invested in settlement negotiations. The court also held that Casco could recover fees for time spent on claims or motions it lost because those claims were factually interrelated to the claims it won. As a final straw that broke the proverbial camel’s back, the court dismissed Deere’s attempt to recover its fees under the contract for the counterclaim for collection of monies it won mid-trial. The court held that this claim for contractual fees was an element of the collection of monies counterclaim for damages that should have been briefed in the pretrial conference report and tried before the jury, so it was waived. It was doubly waived too because Deere did not claim contractual fees as a prevailing party in its own Rule 54 motion that the court had previously denied. What may turn out to be significant in fee litigation in other cases, the court cited federal cases holding that where the opponent puts its own fees at issue the moving party can allow discovery of the opponent’s fees to prove the reasonableness of its fee application. Deere claimed that it was entitled to recover $1.3 million in fees it spent to litigate the case it lost. It argued that it was entitled to offset those fees from Casco’s fee recovery. The court would have none of it because any such claim was waived and a set off would not have been proper under Puerto Rico law. What is more, the court held that Deere having spent almost twice as much as Casco did to win the case proves that Casco’s attorneys litigated the case more efficiently and effectively. Finally, the court awarded post judgment federal interest on the total fee award accruing from the date in the order determining the amount of the award. While not addressed in the opinion, federal circuit courts, however, are split on the question whether post-judgment interest on a fee award accrues from the date of the original merits judgment or from the subsequent order awarding fees, which in this case, was six years later.

First Circuit vacates order compelling arbitration of a Law 75 impairment claim brought against a non-signatory subsidiary

It happens every once in a blue moon when a federal court vacates an order compelling arbitration. Air Con-Inc. v. Daikin Applied, 21 F. 4th 168 (1st Cir. 2021) is one of those rare instances. Air Con is a Puerto Rico distributor of branded air conditioners. Air Con sued Daikin Applied (the wholesaler-subsidiary) in federal district court for impairment under Law 75 alleging that it impaired an exclusive distribution relationship. Air Con and Daikin Applied’s parent company (Daikin Industries Ltd.) had a written non-exclusive distribution agreement with an arbitration provision that required the parties to arbitrate in Japan. But, the parent company, a non-party in the case, did not counter-sign the agreement. Air Con alleged that, since 2000 until the facts in 2015 leading up to the lawsuit, it had a separate exclusive distribution relationship with the subsidiary corroborated by a course of dealings but not memorialized by any written distribution agreement. The question was whether the district court erred in compelling arbitration of the Law 75 claim against the subsidiary with which no arbitration agreement existed. The First Circuit found it was error and reversed. Procedurally, the First Circuit joined the majority of sister circuits in holding that motions to compel arbitration under Section 4 of the FAA are subject to the standards of motions for summary judgment. Substantively, the decision is significant in several legal fronts. First, the district court erred in finding that the distributor’s contract with the parent was enforceable by the subsidiary. Even if there was any such enforceable contract, this was error because there is a legal presumption of corporate separateness that must be overcome by clear evidence that the parent in fact controls the activities of the subsidiary. The error was compounded by the district court’s imposition of the burden of disproving the existence of a valid arbitration agreement on the non-moving party. Second, there was error in discrediting the allegations that the distributor had a separate distribution relationship with the subsidiary governed by an “unwritten agreement” and that relationship had no arbitration mandate. Third, the subsidiary argued that the distributor’s placement of purchase orders under a “Daikin Sales Order” constituted an acceptance of arbitration. The Sales Order had an arbitration agreement with the locale in Miami, Florida, for all claims arising or relating to the contract or its breach. Significantly, the First Circuit held that the arbitration provision covered only disputes relating to each particular sale authorized by that contract. But its scope did not extend to the separate impairment claim for a “pattern of unfair practices” brought under Law 75. Daikin Applied not only recognizes the limits of how far arbitration can reach but also that arbitration is a creature of state or territorial contract law. And, there can be diverse but separate business relationships that define how products of one brand get from the supplier or manufacturer, to the wholesaler (the defendant subsidiary in this case), to the distributor (the plaintiff), and for sale to customers in the relevant market. What was at stake in this case was the distributor's claim that Law 75 protected its years-long exclusive distribution relationhip with a stateside wholesaler for the sale and distribution of products in Puerto Rico. It mattered to the court's holding that this separate commercial relationship, protected by Puerto Rico Law 75, did not have an arbitration mandate, so it was erroneous to compel it.