Law 75/21 appeals in the First Circuit’s docket

I’ve identified so far three appeals dealing with Law 75/21 claims in the First Circuit’s active docket. Two appeals are from denials of preliminary injunctions and the other is a direct appeal and mandamus from a remand order. Caribe Chem Distributors v. Southern Agricultural Insecticides, No. 21-1918, appeal from remand order, 2021 WL 5406563 (D.P.R. 2021), raises an underlying Law 75 claim for an alleged breach of an exclusive agreement to distribute insecticides. The appeal raises issues of first impression in the First Circuit whether a remand order based on the so-called voluntary/involuntary rule is appealable. If so, whether the Law 75 principal-defendant can remove the case to federal court after the state court's notice of a final partial judgment granting a motion to dismiss the diversity-defeating Puerto Rico codefendants that created complete diversity for removal. Most federal courts hold that a defendant can only remove in those circumstances if the plaintiff voluntarily dismissed the action against the non-diverse parties because an involuntary dismissal (such as an order granting a motion to dismiss) is appealable (and, in theory, if the losing party wins, the state court could destroy federal jurisdiction after removal). There is a more recent line of out of circuit federal cases going in the opposite direction finding removal jurisdiction. The undersigned represents the principal as lead counsel in that case. The other two appeals raise more directly Law 75/21 issues involving distributor appeals from orders denying preliminary injunctions. Both are reported in this Blog. B. Fernández v. Anheuser Bush, 2023 WL 2776304 (D.P.R. 2023), appeal pend’g, No. 23-1293, (1st. Cir. 2023) and José Santiago, Inc. v. Smithfield Foods, Inc., 2022 WL 2155023 (D.P.R. 2022), No. 22-1491 (1st Cir. 2022) (argued).

Starting an arbitration on the wrong foot after losing a preliminary injunction

There is a risk-reward calculus in the decision whether to move for a preliminary injunction in a civil case. Particularly in Law 75/21 cases, the reward to the distributor can be high because a favorable ruling preserves the status quo ante pending trial. An injunction could forestall a termination or the appointment of a competing distributor for years. It throws a monkey wrench in the principal’s business plans which to resolve requires an appeal, a settlement, or going through years of litigation. But the risks are high to the distributor from losing a preliminary injunction and the practical consequences cannot be overlooked. Losing an injunction means, among other things, that the distributor has not proven its likelihood of success on the merits of its case. While a decision on a preliminary injunction is not an adjudication on the merits, having a federal court hold that the case lacks merit is negative when an arbitrator (or the judge himself/herself) must pass judgment on the same issues with a more developed record or after a trial or hearing. There is less risk, of course, if the trier of fact is a jury but still the distributor would have to survive a summary judgment motion with the same judge who denied the injunction. For these reasons, the strategic decision whether to move for an injunction should not be made automatically or lightly. In B. Fernandez Hmnos. V. Anheuser-Bush, 2023 WL 2776304 (D.P.R. Feb. 2023) (Velez-Rive, J.), appeal pend’g, (1st Cir. 2023), the dispute arose from an agreement to distribute beer in military installations and diplomatic corps facilities in Puerto Rico. The agreement expired on its own terms but the parties stipulated that it continued in effect under the same terms and conditions via “an unwritten extension”. Caveat emptor: the agreement had an arbitration clause. The distributor sued the principal in federal court after termination of the agreement asserting multiple Puerto Rico law claims. Interestingly, the distributor pleaded a Law 21 claim and went all cards in with a motion for a preliminary injunction which it lost but not before the federal court compelled arbitration. The court held that under either New York law governing the agreement or Puerto Rico Law 21 the distributor had not proven the elements for an injunction in aid of arbitration. What I find most significant in this opinion is the choice of law ruling. The agreement had a New York choice of law clause coupled with an arbitration clause. Adopting the Magistrate’s recommendation, the court held that an arbitrator, who was called under the FAA to decide the question, would not under New York law be compelled to apply Puerto Rico law despite “public policy considerations.” Even applying Law 21 to the merits, the distributor would lose because the facts established at the hearing showed that, as an independent contractor, it had no authority to bind the principal which was a sine qua non to find a sales representation relationship. Providing logistical support is insufficient to establish a protected Law 21 relationship. As for irreparable harm, the distributor’s testimony that termination of the agreement had a negative effect on the company was insufficient without proof of loss of goodwill. All other claims failed under New York law. The distributor appealed to the First Circuit. The district court’s ruling, unless reversed, sets the tone if not the roadmap of the arbitration to follow.

De facto exclusive is not what you think it means and there’s a new but not true intra-district conflict

Willert is a manufacturer of household products. In Ramos v. Willert Home Products, 2023 WL 234758 (D.P.R. 2023) (Arias, J.), Plaintiff claimed that, for “over 40 years,” it served as Willert’s exclusive distributor in Puerto Rico and the Dominican Republic. In 2011, Plaintiff delegated some of the distributor’s functions or obligations to another distributor (PRSG) in a contract where the latter assumed distribution responsibilities over the Willert line. Plaintiff retained sales responsibilities and received from Willert commissions on sales. In 2021, Willert notified that it would be unilaterally terminating all sales representation agreements as part of a global business strategy. Plaintiff filed a federal suit claiming damages for termination and impairment of a sales representation agreement under both Law 21 and the Civil Code for breach of contract. Two facts or business decisions would prove fatal to Plaintiff’s case under Law 21. First, the business relationship, if it started in the 1970’s predated the enactment of Law 21, but not Law 75. Second, and possibly more important, Plaintiff’s delegation of its distribution obligations to PRSG meant that it would have had no basis to state a Law 75 claim from the termination. Plaintiff, in effect, ceased being a Law 75 dealer and morphed as a sales representative. Because Law 21 does not apply to the relationship established with Willert before its enactment in 1990, Plaintiff ran out of luck. Whether Plaintiff calculated the risks of losing any protection from Puerto Rico’s relationship laws that the delegation would have is unknown. It all went predictably downhill from there. The court held that Plaintiff could not state an actionable Law 21 claim because the statute does not apply retroactively. That should have been enough to dismiss the case under Rule 12(b)(6) but in dicta the court went further. Applying settled law, the court held that Puerto Rico law does not apply extraterritorially to provide a damages remedy for sales within the Dominican Republic. And, the district court readily dismissed the breach claim under the Civil Code for the contract was terminable at will. As the final dagger in the distributor’s heart, and breaking stride with the Homedical v. Sarns, 875 F. Supp. 947 (D.P.R. 1995) line of cases, Judge Raul Arias in dicta determined that the complaint also failed to plead the elements of exclusivity required by Puerto Rico Law 21. The complaint failed to allege an exclusivity contract, or an exclusive arrangement agreed by the parties. This was unncessary to the court's decision since it held that Law 21 did not apply to the agreement. It is insufficient, says the court, to conclusorily allege a de facto exclusive relationship even over decades without ostensible facts proving that the principal consented or acquiesced to it. Those overt intentional acts (not pleaded in the complaint) tending to show an exclusive course of dealings would include the supplier’s communications recognizing exclusive rights or refraining from selling product to other distributors, among others. The court relied on IOM Corp. v. Brown Forman, 627 F. 3d 440 (1st Cir. 2010), but it seems distinguishable. In IOM the parties had executed a written and integrated non-exclusive agreement, so proving exclusivity from a course of dealings was legally problematic. What is remarkable is the notion that an exclusive course of dealings over decades without an integrated and complete written agreement as in this case would apparently not be, by itself, enough to survive a motion to dismiss. The court's rationale about the meaning of exclusivity reflects viewing exclusivity as a restriction on the principal’s autonomy as opposed to a right or legitimate expectation derived by the distributor from a continuous course of dealings. The court prioritizes the principal's expectations over the distributor's to give no credence to the alleged course of dealings at the pleading stage. But the court’s rationale ignores the commercial reality that principals derive benefits and tangible value from a sole distributor’s investments and efforts acting as if the relationship was in fact exclusive and there would be no intrabrand competition. The court’s decision conflicts with Homedical (among others), a Law 75 case decided on summary judgment with a developed record but importantly where the principal never acknowledged plaintiff’s exclusivity despite years of an exclusive course of dealings. Judge Arias' ruling might spill over in Law 75 litigation in the months and years ahead.