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.