Casellas Alcover & Burgos, P.S.C. on Puerto Rico Law 75

Federal Court enforces arbitration award of $3.7 million under Law 75 in favor of Puerto Rico distributor

2012-01-08T18:21:00.001-05:00

In Thomas Diaz Inc. v. Colombina, S.A., 2011 WL 6056717 (D.P.R. Dec. 6, 2011)(PG), Thomas Diaz Inc. (TDI), a Puerto Rico distributor of candies, successfully arbitrated a dispute with Colombina Inc., a Colombian corporation. The sole arbitrator was Angel (Paco) Rossy, a prominent retired Judge of the Court of Appeals of Puerto Rico. Arbitrator Rossy had been the Chairman of the Panel in the Mendez & Co. Inc. arbitration under Law 75 previously reported in this Blog. Mendez prevailed in the arbitration and recovered substantial damages.

After bifurcating liability from damages, the Arbitrator found that Colombina had terminated a forty-year relationship without just cause and awarded TDI substantial damages under Law 75 for lost profits, loss of goodwill, costs, legal interest and expenses. The Arbitrator adopted the contribution of revenues approach deducting only certain variable expenses- a methodology endorsed by the Ballester and Goya line of federal cases to compute five years worth of lost profits from a termination. For goodwill, the Arbitrator was persuaded by the capitalization of future earnings approach over the IRS excess earnings method, which came with a seal of approval by the Puerto Rico Supreme Court’s Dayco decision. The record does not reflect the reasons for the termination. It does not appear that the Arbitrator considered or awarded attorney’s fees to the prevailing party under Law 75. Colombina did not challenge the partial award finding no just cause for the termination.

In May 2010, TDI filed a motion (improperly denominated a “complaint”) to confirm the award in federal court under Section 9 of the FAA invoking the court’s diversity jurisdiction. Colombina filed a cross motion to vacate or modify the award. Following the Supreme Court’s Hall Street decision and noting the extremely deferential grounds for review of arbitration awards, the District Court (Perez-Gimenez,J) held that the FAA preempted Puerto Rico’s arbitration statute to the extent that it provides “lesser protection” for the enforcement of arbitration awards. The court then confirmed the award and denied the motion to vacate concluding that the Arbitrator’s Award is plausible, supported by the record, and based on valid legal principles. The court denied TDI’s request for attorney’s fees for the enforcement action finding that Colombina was not frivolous to challenge the award at least taking into account its size.

Colombina’s advocacy could not have helped its cause as the District Court found many of its arguments incomprehensible and deemed waived. Courts often wave goodbye and leave unpunished uncivil or overzealous litigation providing no deterrent for future misdeeds, but this Judge would have none of it as can be appreciated from the Court’s footnote:

“…When making reference to the Arbitrator’s Award, the Defendant’s motion to vacate (Docket No. 29) is riddled with empty phrases such as “blindly capricious ... adoption,” “blatant disregard of law,” “basic flawed assumption,” “such flawed logic,” “palpably faulty,” “patently absurd and faulty assumption,” “draconian windfall of punitive nature,” “magical tergiversational twist of ... financial realities” among others. The Court had to ferret through the motion in order ascertain the grounds of Defendant’s objections to the Arbitrator’s award. Therefore, to the extent the Defendant’s arguments were unclear or incomprehensible to this Court, the same are hereby disregarded.”

In the end, reasonable persons can disagree and take sides with the damages methodology of the Award, but the rule of law prevailed when the District Court, albeit not so promptly, confirmed the award into a Judgment.

Declaratory judgment is appropriate vehicle to obtain declaration of just cause for termination of agreement in Law 75 case

2011-12-05T12:32:00.001-05:00

In General Motors v. Royal Motors Corp., 769 F. Supp. 2d 73 (D.P.R. Feb. 1, 2011)(Gelpí, J.), GM filed a preemptive suit against one of its dealers seeking a declaration under 28 U.S.C. §2201 that it had just cause for termination of the motor vehicle dealer agreement with one of its dealers. GM alleged that the dealer submitted false or fraudulent claims related to warranty repairs of vehicles which constituted a material breach of the agreement. GM pleaded complete diversity of citizenship and the amount in controversy exceeded the requisite jurisdictional amount.

The dealer moved to dismiss the action for lack of subject matter jurisdiction. It alleged that the complaint did not satisfy the jurisdictional minimum and did not present a justiciable controversy. The court held that the amount in controversy “is measured by the value of the object in the litigation.” Because the “value of the dealer agreement” exceeds the jurisdictional minimum, the court denied the motion to dismiss on that basis.

As to the justiciability of the claim, the court found that the federal Declaratory Judgment Act “is designed to enable litigants to clarify legal rights and obligations before acting on them.” “GM’s right to terminate its contractual relationship is the exact type of dispute considered ripe for declaratory judgment”, held the court. The court also found that GM showed the hardship it would suffer absent a judicial determination of its rights and denied the motion to dismiss.

Note: CAB represents General Motors in the litigation.

Plaintiff wins a remand to local court but loses a tortious interference claim in federal court: was it a pyrrhic victory?

2011-12-01T16:35:00.001-05:00

In Alpha Biomedical v. Phillips Medical, 2011 WL 5837374 (D.P.R., Nov. 21, 2011)(Besosa, J.), Plaintiff, a distributor of medical equipment, filed an action in local court asserting claims under Law 75, tortious interference, and defamation against various Phillips corporations for breach and interference with an alleged verbal distribution contract. Defendants removed the case alleging that certain non-diverse defendants had been fraudulently joined to defeat diversity. Plaintiff moved to remand. A U.S. Magistrate recommended that the action should be remanded, which the Court adopted. The Magistrate (Silvia Carreno, J.) found that the standard of fraudulent joinder was unsettled in the First Circuit and adopted a prong of a Fifth Circuit test whether Plaintiff fails to state a claim upon which relief can be granted against the non-diverse defendants. She determined that the complaint properly pleaded a claim for defamation and there could not be a finding of fraudulent joinder.

Things then get tricky. While the Magistrate’s determination on the existence of a valid defamation claim sufficed to require granting the motion to remand for lack of jurisdiction, the Magistrate went further and concluded that Plaintiff failed to state a claim for tortious interference, which the Court agreed. Was there subject matter jurisdiction to make such a recommendation? The issue was not addressed in the opinion. Over Plaintiff’s objection, the Court held that Puerto Rico law would not recognize a valid claim for tortious interference with a verbal contract having an indefinite term and is terminable at will. Law 75 contracts without a fixed term could become indefinite in the sense there can be no lawful termination without just cause. However, Plaintiff’s allegations were defective in that it failed to allege the duration of the alleged verbal agreement or that it was in effect at the time of the alleged interference. The Court adopted both the recommendation to remand the case for lack of jurisdiction and the decision not to award attorney’s fees as the removal was objectively reasonable, citing Martin v. Franklin, 546 U.S. 132, 141 (2005).

Would the Court’s adoption of the Magistrate’s recommendation that no valid tortious interference claim exists be res judicata upon remand of the case to local court? It is questionable whether the court’s de facto dismissal of the tortious interference claim is reviewable on appeal when a remand order is not. The court’s determination that a valid defamation claim exists was enough to remand the case for lack of jurisdiction. It remains to be seen if the local court will pass judgment independently on the Court’s reasoning or conclude that the determination to dismiss the tort claim is res judicata. Did Plaintiff really win at all with remanding the case?

A powerful weapon in the arsenal: the new trade secrets Puerto Rico Law No. 80 of June 3, 2011 would provide substantial remedies for violations of confidentiality obligations in distribution contracts

2011-09-11T13:11:00.000-04:00

Distribution contracts generally contain provisions protecting confidential business information, such as client lists, price lists, marketing and other business plans and strategies.

It used to be that a party affected by a breach of a confidentiality obligation had to sue in tort or breach of contract under the Civil Code with the burden to establish the existence of a trade secret under the rules of evidence and prove damages. Law 75 did not provide a claim for relief. In the distribution context, breach of confidentiality issues may arise when a key employee with access to confidential information leaves the firm to a competitor or to the other contracting party, or when the principal terminates the contract and the distributor uses confidential information obtained during the relationship for its financial benefit (or the other way around).

On June 3, 2011, the Legislature of Puerto Rico enacted a far-reaching law protecting trade secrets and providing substantial remedies for unauthorized violations. The law is patterned after the Uniform Trade Secrets Act.

The elements of a claim under Law 80 are: 1) proof of a “commercial secret” (a defined term meaning information which provides an actual or potential economic benefit, is not public, and whose confidentiality has been maintained by reasonable means); 2) the commercial secret has been misappropriated; and 3) it has caused damages to the owner.

The statute provides preliminary, permanent injunctive relief, and the payment of royalties in extraordinary circumstances. The measure of damages can be substantial; including actual damages and “additional damages” to the extent that the offending party has derived a benefit from the use of the confidential information, or in the alternative, the payment of royalties. The measure of damages includes lost profits, the value it would have cost to develop the information, depreciation, development costs, and market value of the information.

If the violation was intentional or in bad faith, the court has discretion to award three times the amount of actual damages and grant attorney’s fees. The Law supplements any remedies that the parties may have under the contract and other laws. Thus, regardless of any contractual provision, Law 80 provides relief to the owner for damages caused from the misappropriation of commercial secrets.

Law 80 claims will most certainly arise in the labor-employment context and in actions involving a breach of fiduciary duties. But, Law 80 will become relevant in commercial litigation as well. I would expect that a Law 80 trade secret claim will go hand in hand with trademark infringement claims and those under Law 75. Because of its recent enactment, there is no case law so far interpreting its provisions.

The battle in arbitration under Law 75 between Puerto Rico’s largest distributor and the world’s leading producer of rum reaches federal district court

2011-09-03T10:25:00.003-04:00

The Puerto Rico sub-distributor V. Suarez filed an action in local Bayamon court, where it has its principal place of business, seeking to vacate a commercial arbitration award under Puerto Rico law. The principal Bacardi countered with a removal of the action to federal court and the filing of a separate federal action to confirm the award under the Federal Arbitration Act.

As reported in my previous blog, a commercial arbitration panel of the AAA ruled in favor of Bacardi, as a matter of first impression, that sophisticated parties may, by contract, predetermine the methodology to value the principal’s direct contribution and goodwill associated with the line and set off that value from the distributor’s actual damages in the event of an unlawful termination under Law 75.

The award is part of the public record in the proceedings to vacate and confirm the award. The cases pending in the U.S. District Court of Puerto Rico are styled V. Suarez & Co. v. Bacardi International Limited, No. 11-01858 (GAG) and Bacardi International Limited v. V. Suarez & Co. Inc., No. 11-01871. Stay tuned.

In a case of first impression, a commercial arbitration panel of the AAA validates provisions for the computation of damages in a distribution agreement governed by Law 75

2011-07-31T16:03:00.001-04:00

In a watershed ruling, a commercial arbitration panel of the American Arbitration Association has decided that sophisticated corporations may pre-determine the methodology for computing actual damages in the event of a future termination of the business relationship without violating Law 75.

There, a renowned worldwide producer of liquor entered into a distribution agreement with a Puerto Rico distributor. The brands and products that were subject to the agreement were famous, had an established goodwill in the Puerto Rico market, and produced significant annual revenues to the previous distributor, an entity affiliated to the producer. The agreement did not require the new distributor to pay a franchise fee, make any capital investments, or provide any consideration in exchange for the exclusive distribution rights.

The parties negotiated at arms-length with the advice of counsel and agreed on the formula to compute damages in the event of a termination without just cause. Essentially, the agreement established the annual distribution value of the exclusive distribution rights owned by the producer that would be conditionally granted to the distributor. The distribution value was based on actual historical data of revenues generated by sales of the products in the Puerto Rico market and an estimate of the new distributor’s direct costs. If the measure of actual damages under Law 75 was less than the distribution value, the distributor would recover zero damages in the event of an unjustified termination. Under the agreement, the distributor could only recover the excess profits generated by its efforts to the extent that those exceeded the distribution value.

The distributor argued that the damages provisions infringed Law 75 as a waiver of rights, but a majority of the panel disagreed. The Panel recognized that the Puerto Rico distributor cannot recover for the franchisor’s goodwill and value of its trademarks. Further, the measure for computing damages did not violate Law 75 because there is no prohibition from valuing the manufacturer’s goodwill (which the distributor did not create or contribute) and setting off that value from the measure of actual damages under Law 75. Damages under Law 75 are not automatic or mandatory, ruled the panel in favor of the producer.

This decision may have a significant impact in the way that distribution agreements are negotiated and executed, especially for famous brands that have an established clientele and goodwill in the Puerto Rico market.

Author’s note: The undersigned is lead counsel for the producer in the arbitration proceedings, with Rosalie Irizarry participating as trial counsel and Natalia Morales for research and motion practice.

First Circuit vacates final judgment for a supplier in a Law 75 case after consolidation of a preliminary injunction hearing with a bench trial on the merits did not provide adequate prior notice.

2011-07-05T15:34:00.002-04:00

In Lamex Foods v. Audeliz Lebron, No. 10-1677 (1st Cir. June 27, 2011), the First Circuit vacated the District Court’s (Fusté, J.) Judgment holding that consolidation of a preliminary injunction hearing with a bench trial on the merits without providing adequate and clear prior notice violated the constitutional right to a jury trial.

Plaintiff Lamex is a Minnesota corporation that facilitates the sale of food from manufacturers to suppliers and vendors worldwide. Plaintiff entered into a “business relationship” where it purchased frozen chicken for resale to Defendant ALC, a Puerto Rico corporation, that supplies product to supermarkets and retailers in Puerto Rico. In 2009, after failed collection attempts, ALC fell behind in its payments for poultry sold and delivered totaling $1.2 million. Lamex, among other actions, canceled ALC’s account and cashed in on a letter of credit tendered as security.

ALC sued Lamex first in local court alleging violations of Law 75. Before Lamex was served, it sued ALC in federal court naming ALC and its President as defendants. Lamex sought to recover payment of unpaid monies due and to pierce the corporate veil to hold the President personally liable. Lamex also sought a declaration that it was not a principal under Law 75, and even if it was, it had just cause to terminate the relationship.

There were mixed or contradictory signals on the record whether the court had in fact consolidated the case. After an evidentiary hearing, the District Court found for Plaintiff in all respects on its complaint except that it disallowed the request to pierce the corporate veil.

Defendant appealed and argued that the court erred in consolidating the preliminary injunction hearing with a bench trial on the merits. The First Circuit accepted, without deciding, an argument for the present case that Law 75 actions are essentially legal to which the Seventh Amendment attaches. Despite Defendant’s counsel’s failure to object to consolidation, the First Circuit held that the court’s failure to give unequivocal and adequate prior notice did not comply with the heavy burden to show a waiver of the constitutional right to a jury trial.

Thus, the court vacated the judgment with respect to the claims for declaratory relief and to pierce the corporate veil and remanded the action for further proceedings. Significantly, because Defendant conceded the amount and existence of the debt owed to Plaintiff, it affirmed the court’s monetary judgment in Plaintiff’s favor. As to the appeal from a discovery sanction, the court affirmed the court’s imposition of sanctions against Defendant for its President’s evasive and non-responsive answers during his deposition.

Dealers beware: is acceptance of commissions for direct sales by supplier in contravention of exclusive distributorship agreement by itself a waiver of a breach of contract claim under Law 75?

2011-06-28T12:24:00.001-04:00

The issue often arises when a dealer claims that payment of commissions by its principal for direct sales made by another distributor (or retailer) to its customers in the exclusive territory is proof of an exclusive distributorship. Case law in Puerto Rico is mixed on the issue. One First Circuit case holds that payment of commissions does not legally modify the terms of a clearly non-exclusive distributor agreement. Problems arise (for the supplier) when a clearly non-exclusive distributorship agreement has expired or there is no written agreement at all. In those circumstances, as in a reported federal district court case, the payment of commissions may create a genuine triable issue of fact on the existence of exclusivity. In their commercial dealings parties may contractually agree that payment of commissions is the quid pro quo or consideration for exclusive distribution rights. But, absent a contract, it is by no means settled that payment of commissions is per se proof of exclusivity.

Picking up where I left off in my prior blog that common law authorities may be persuasive when interpreting Law 75, at least in the State of Ohio, an appellate court (but reversed on other grounds) held that payment of commissions is a waiver of a breach of contract claim. In Miller v. Wikel Manufacturing Company, 545 N.E. 2d 76 (Ohio 1989), a jury found that a principal had impaired and terminated an exclusive distributorship agreement and awarded damages of $1.5 million for breach of contract.

On the relevant issue, the appellate court reversed the verdict and reasoned:

“It was proven at trial that the Millers [the distributor] had been aware of direct sales by Wikel Mfg. [the principal] in Michigan since 1971 and that the Millers had accepted commissions on these sales. Such sales were in contravention of the exclusive distributorship contract. The court of appeals reasoned that the Millers’ election to continue as Wikel Mfg’s distributor, notwithstanding Wikel Mfg’s actions, constituted a waiver of their rights under the agreement, and thus, that they were estopped from asserting a breach of contract claim on this basis.” See 1998 WL 62980 Ohio App. 1988, citing, Section 683 of Williston on Contracts (“….where a contract is breached in the course of its performance, the injured party has a choice presented to him of continuing the contract or refusing to go on.”), reversed on other grounds, 545 N.E. 2d 76.

These facts depict a scenario of “willful blindness”, “deliberate acquiescence”, or “laches” by a distributor who has knowledge of the breach for years but elects to continue the relationship receiving benefits under the contract in exchange for additional consideration consisting of commissions. Unless the dealer protects itself with contractual language to ensure that the commissions do not novate (or affirmatively ratify) existing exclusive rights, there is a risk of waiver or estoppel from accepting commissions in the face of a clearly exclusive contract.

Right or wrong, this is all dicta as the appellate court’s holding never became law of the case. The Supreme Court of Ohio did not reach the waiver issue on the merits for it reversed the appellate court, reinstated the verdict, and held that waiver and estoppel are affirmative defenses which were waived in the case. Thus, the appellate court erred in raising the issue sua sponte.

The interplay of comparative law and Law 75: is it appropriate for guidance?

2011-06-20T11:38:00.000-04:00

“[A] U.S. Court interpreting a federal statute or constitutional provision can look at the reasoning of a foreign or international tribunal on similar issue.” Al-Bihani v. Obama, 619 F.3d 1, 33 n. 18 (D.C. Cir. 2010)(Kavanaugh, J., concurring), citing Ruth Ginsburg, “A decent respect to the Opinions of [Human] kind”; The Value of a Comparative Perspective in Constitutional Adjudication, Address to the International Academy of Comparative Law (July 30, 2010). While foreign decisions do not rank as precedent, they can be informative and just as persuasive as reasoned law review articles or commentators on the subject matter. See, i.d.

When interpreting Law 75 it is advisable to resort to common law and civil law jurisdictions for their persuasive value. Foreign jurisdictions which can be persuasive include Spain, Cuba and the Dominican Republic, the last two have statutes similar and preceding ours. But common law jurisdictions have also shaped many of the amendments to the presumptions of lack of just cause in Law 75, including California, Colorado, Florida, Georgia, Illinois, Indiana, Kentucky, Maine, Massachusetts, Mississippi, North Carolina, Nevada, New Hampshire, New Jersey, New Mexico, Ohio, Rhode Island, South Carolina, Tennessee, Texas, Vermont, and possibly, Wisconsin. See Report of the Chamber of Commerce of Puerto Rico, P. of C. 774, at 3, April 23, 1986; Report of the Chamber of Commerce of Puerto Rico, P. of. C. 774, at 4 May 10, 1998.

Delaware enacted a “Franchise Security Law” on July 8, 1970 protecting certain franchisees with a place of business within the state from unjustified terminations. Damages include lost profits and loss of goodwill. “[Delaware law], within the ambit of legislation in the United States, is closest in its focus to Law 75.” See 97-page Study about Law 75 of 1964, Chamber of Commerce of Puerto Rico (undated)(translation ours).

In future blogs, I will comment about noteworthy state and foreign decisions which may be helpful to resolve open issues under Law 75.

Law 75 protects dealers who develop the “market” in Puerto Rico. But, does the “market” include federal military installations, cruise ships, or duty free shops?

2011-06-15T15:00:00.000-04:00

There are two elements for Law 75 to apply, prima facie, first, the statute protects a Puerto Rico dealer, and who qualifies as a dealer is a highly factual question; second, the business activities of the dealer must be directed to promote the sale or service of the principal’s products or services within the Puerto Rico market. Thus, the statute does not extend coverage to stateside or foreign distributors at least to those that have no sales or distribution offices or operations within Puerto Rico. Nor should Law 75 have an extraterritorial reach for sales made outside of the Puerto Rico territory. Accordingly, the measure of damages in Law 75 should not include any sales made by a Puerto Rico distributor outside the Puerto Rico market. That should be straightforward enough.

But, what is the market within the geographic boundaries of Puerto Rico that is covered by Law 75? Plain language of Law 75 does not help to answer that question. Are sales made to federal military customers within federal military installations in Puerto Rico covered? In Patterson v. Ford Motor, 931 F. Supp. 98, 102 (D.P.R. 1996), the issue was raised but the court did not answer the question ruling instead that Plaintiff, a sales representative, did not qualify as a Law 75 dealer. Would sales made by Puerto Rico distributors to cruise ships that dock within Puerto Rico’s territorial waters be covered by Law 75? Are duty free sales at the LMM international airport covered? Does the answer to these questions turn on constitutional or quasi-political definitions of what is a “territory”? If that’s the right test then arguably sales to U.S military installations within Puerto Rico may not be covered. Or does the answer turn instead on the practical import of who is the ultimate consumer for the products (understanding that many but not all consumers are Puerto Rico residents) and what benefits does the principal derive from sales by Puerto Rican distributors to these outlets (military bases, cruise ships, and duty free shops) all of which have a nexus to Puerto Rico? Either way there is no definitive answer on point in the case law to these questions.

Puerto Rico distributors: beware of ICC arbitration clauses in distribution agreements

2011-05-31T18:57:00.002-04:00

International arbitrations are a common ADR procedure to resolve commercial disputes, including Law 75 actions. There are many reasons to choose arbitration: no jury trial…the blessing of Supreme Court precedent and FAA preemption, a panel of experienced professionals, and presumably a quicker and more cost effective mechanism etc. It is no secret, however, that arbitration can be expensive, and often more so than court cases, but rarely do the parties foresee, at the time of contracting, the substantial costs and fees that must be advanced by the claimant to initiate an international arbitration.

For arbitrations under the International Chamber of Commerce (ICC), for example, the initiating party, which may be the aggrieved distributor, must advance up front the administrative fees to cover the expenses of the ICC and the arbitrator(s). When those fees approach 10% of the face amount of the distributor’s claim, well if you do the math, those fees can be substantial just to get “your day in court”.

So far, at least in commercial disputes, courts have been reluctant to invalidate ICC arbitration clauses as substantively unconscionable because of the substantial costs to arbitrate the dispute. Kam-Ko Bio-Pharm v. Mayne Pharma, 560 F. 3d 935 (9th Cir. 2009), citing, Green Tree Fin. V. Randolph, 531 U.S. 79 (2000).

Would Puerto Rico Law 75 override a Delaware choice of law clause?

2011-05-23T16:24:00.001-04:00

A series of published federal cases hold that Puerto Rico Law 75 displaces contractual choice of law clauses of certain common law jurisdictions in distribution agreements, notably New York (among others). Many of those cases have applied the Restatement of Conflict of Laws to conclude that Law 75 is vested with public policy and Puerto Rico has a significantly greater interest in applying its laws over the transaction. Would the result be the same in all common law jurisdictions?

When drafting distribution agreements one should consider the possibility that not all States would necessarily enforce Law 75 and override a freely-executed choice of law clause. There are States which hold themselves out as having a body of fair and efficient substantive commercial laws that offer uniformity and predictability to business actors. The State of Delaware is one of those jurisdictions with a choice of law enactment that values the parties’ freedom of contract. 6 Del. C. Sec. 2708 (a)(2005) provides that: “[t]he parties to any contract, agreement or other undertaking, contingent or otherwise, may agree in writing that the contract, agreement or other undertaking shall be governed by or construed under the laws of this State, without regard to principles of conflict of laws, or that the laws of this State shall govern, in whole or in part, any or all of their rights, remedies, liabilities, powers and duties if the parties, either as provided by law or in the manner specified in such writing are, (i) subject to the jurisdiction of the courts of, or arbitration in, Delaware and, (ii) may be served with legal process. The foregoing shall conclusively be presumed to be a significant, material and reasonable relationship with this State and shall be enforced whether or not there are other relationships with this State.”

While Section 2708 has not been interpreted in the context of either Law 75 or franchise or distribution agreements, it applies to contracts of $100,000 or more as a matter of public policy where Delaware law has a material relationship to the transaction. As Delaware’s Court of Chancery noted in Abry Partners v. F&W Acquisition LLC, 891 A. 2d 1032, 1050 (Del. Ch. 2006), when enforcing a Delaware choice of law provision in a stock purchase agreement, “[t]o enter into a contract under Delaware law and then tell the other contracting party that the contract is unenforceable due to the public policy of another state is neither a position that tugs at the heartstrings of equity nor is it commercially reasonable.”

Some pitfalls that suppliers should avoid when doing business with distributors or representatives in Puerto Rico

2011-05-07T10:41:00.002-04:00

Having counseled suppliers and distributors in Puerto Rico for over two decades has given me an insight of the most common pitfalls in distribution practice. The list below is by no means exhaustive and there are many variations or nuances.

First and foremost, doing business without a contract (or verbally) when combined with failing to procure timely legal advice from local counsel, is a time bomb waiting to go off. This by itself creates a host of problems to a supplier and often will land you into litigation and then at the mercy of a jury of the distributor’s peers. Having no contract exposes the supplier to claims of indefinite or exclusive contracts with open ended or ambiguous terms, among other risks.

Second, there is an assumption that many agents are not distributors when they could qualify for protection under Law 75. In Puerto Rico a number of representatives throughout the distribution chain could serve as distributors though one would not think so from their corporate form alone. For instance, some retailers could qualify as Law 75 dealers if they meet the legal standards.

Would you think that an independent retail store selling or servicing your branded products in Plaza Las Americas could claim protection as a Law 75 dealer, or an exclusive representative promoting your branded medications on a commission basis to doctors and hospitals? Would the transfer of title of products outside PR by itself exempt you from Law 75's reach? Think again.

Third, there is a misconception that PR is unique in protecting dealers when that is not necessarily so. By my last count 18 states have laws similar to PR. This misconception acts as a deterrent to many companies from doing business in PR. Opportunities are lost when all they need is the right lawyer and the right contract.

Fourth, and this is not unique to PR, time and again we see a failure to document performance issues during the course of the relationship. You may have the right contract but if the obligations are not monitored and enforced properly it is an empty piece of paper.

Fifth, mergers and acquisitions are a minefield for all parties concerned and replete with Law 75 issues which are often discovered after the fact when the successor assumes the obligations directly or appoints a new distributor to take over the distribution.

Sixth, and this relates to my first point, do not assume that if you think you have the “right contract” that it will be automatically enforced under Puerto Rico law. The most common situation is with stateside choice of law clauses in common law jurisdictions that allow termination at will of indefinite contracts. Business decisions have been made to terminate Puerto Rico distributors under the assumption that there is no obligation to renew the contract at its expiration or that no cause is required for termination. Your client may be in for a surprise. Generally, a stateside or foreign choice of law clause in a distribution agreement governed by Law 75 is unenforceable as a matter of public policy. Again, you may think you have the “right” contract and act on it when you should not.

Supplier is barred from creating obligations not specified within the four corners of an integrated distribution agreement to prove just cause under Law 75

2011-04-14T16:19:00.002-04:00

Plaintiff, a Puerto Rico distributor, sued in federal court a stateside supplier of Florida’s Natural orange juice for termination under Law 75. Plaintiff alleged that it complied with its obligations in the one and only written distribution agreement, including with each of the annual purchase requirements. Defendant unilaterally terminated the agreement and appointed a new distributor. As an affirmative defense, Defendant alleged that Law 75 did not apply as the agreement had expired, though there were e-mails in which Defendant acknowledged that the agreement continued in effect on the same terms and conditions. Defendant also alleged that Plaintiff’s delay in submitting requests for reimbursement of marketing expenses was a ground for just cause. Plaintiff filed a motion for partial summary judgment for the court to declare that the agreement continued in effect as an integrated agreement and the Civil Code precluded extrinsic evidence of alleged side agreements or obligations to prove just cause.

In Méndez & Co. Inc. v. Citrus World Inc., 2011 WL 1362468 (D.P.R. March 24, 2011)(Fusté, J.), the federal court sided with Plaintiff and granted its motion for partial summary judgment. The court held that Plaintiff qualified for protection as a Law 75 dealer, and found that the agreement was clear and unambiguous. The court held that, with or without the integration clause, under the Civil Code Defendant was barred from introducing any evidence to prove that Plaintiff had an obligation not specified in the contract to “submit annual marketing plans and budgets…to receive reimbursements of marketing expenses.” This had the effect of precluding an argument at trial that Plaintiff’s alleged failure to submit the required documentation to receive reimbursements (even if the party prejudiced by that failure would have been the distributor) could be grounds for just cause. The parties agreed to mediation. The case is scheduled for trial on May 9, 2011.

Note: the author’s law firm represents Plaintiff in the case.

Federal Court refuses to compel arbitration of claim ostensibly brought under Law 21

2011-04-14T14:01:00.003-04:00

This is yet another case underscoring the risks and liabilities to a principal of doing business with an expired contract.

In a case with an unusual set of facts, in Gonzalez v. Hurley International Inc., 2011 WL 445833 (D.P.R. Feb. 9, 2011)(Casellas, J.), Plaintiff, a sales representative, successfully defeated a motion to compel arbitration convincing the court that her written agreement had expired, was not renewed in writing, and there was no written obligation to arbitrate.

Plaintiff filed suit under Law 21 claiming that she was an exclusive sales representative and Defendant had terminated the agreement without just cause. Plaintiff also alleged that, from a course of dealings, a new and exclusive sales representative agreement arose after expiration of the old contract. The expired agreement had a choice of law clause providing for California law and arbitration in California.

Defendant moved to compel arbitration and responded that the parties continued doing business under the same terms and conditions of the expired agreement. If the agreement continued in effect at the time the claim arose in December 2009, noted the court, Plaintiff would not have an actionable claim under Law 21 because the agreement was expressly non-exclusive and Law 21 requires exclusivity as an element of the claim.

The court held that the agreement was extended once in writing but was not thereafter renewed. Thus, the court concluded that there was no obligation to arbitrate as the agreement expired, and distinguished Gemco v. Seiko, 623 F. Supp. 912 (D.P.R. 1985)(holding that Law 75 extends an agreement indefinitely and denying motion to stay arbitration), on grounds that the agreement at issue was never within the scope of Law 21 as the relationship was non-exclusive.

The court denied the motion to compel but set the tone for a possible motion to dismiss for failure to state an actionable Law 21 claim: “[a]lthough a business relationship between the parties apparently continued, the complaint fails to set forth sufficient facts to determine whether Plaintiff became Hurley’s exclusive sales representative.”

Note: One would have thought that the court had ample grounds to order cause as to why the complaint should not be dismissed for lack of a plausible Law 21 claim and require proof that there was an extinctive novation to create a new exclusive relationship after expiration of the agreement. While Plaintiff may be better off without arbitration, at the end, unless there is extinctive novation, her Law 21 claim may be doomed under Iqbal and Twombly Supreme Court precedent.

Federal Court enforces mandatory forum-selection clause in a distribution agreement despite Law 75’s provision that litigation outside of Puerto Rico violates public policy.

2011-02-10T16:03:00.000-05:00

While Law 75 is a remedial law of public order, courts harmonize the interest to protect Puerto Rico distributors from unjustified terminations after they create a favorable market for the principal’s products and the competing interest behind the enforcement of forum-selection clauses that “increase convenience and predictability for business actors.” Marpor Corporation v. DFO, LLC and Denny’s Inc., No. 10-1312 (D.P.R. Dec. 2, 2010)(Perez-Gimenez, J.). In Marpor, Plaintiff, a Denny’s franchisee, brought an action to declare that the franchisor had terminated an exclusivity provision without just cause. The District Court noted that both federal and Puerto Rico courts generally enforce forum selection clauses in the absence of fraud, bad faith, or overreaching. The court found that the South Carolina forum selection clause in the agreement was mandatory, not permissive. Further, the court held that the legitimate interest of providing convenience and uniformity to business actors as to the locale for resolving their disputes outweighs Law 75’s express provision that dealer disputes must be litigated (and arbitrated) solely in Puerto Rico. Accordingly, the court granted Defendant’s Rule 12(b)(6) motion to dismiss.

The First Circuit applies Iqbal’s plausibility standard to affirm the dismissal of a Law 21 claim and compel arbitration of claims for breach of contract and implied duty of good faith and fair dealing.

2010-12-11T08:50:00.002-05:00

In Ashcroft v. Iqbal, 129 S. Ct. 1937 (2009) the Court heightened pleading requirements holding that “threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice.”

In IOM Corporation v. Brown Forman, slip op., No. 09-1672 (1st Cir. Dec. 2, 2010), the opportunity presented itself for the First Circuit to review an order granting a motion to dismiss under FRCP 12(b)(6) a claim brought under Law 21. A detailed recital of the facts is appropriate as this noteworthy case presents a host of issues that come up regularly in distribution cases in Puerto Rico involving allegations of exclusivity, parole evidence, and integration clauses.

There, the broker Caribbean alleged that it had entered into oral agreements with Brown Forman’s predecessor to promote Finlandia vodka and Jack Daniels whisky in Puerto Rico. Subsequently, the parties entered into promotion agreements on a commission basis. The promotion agreements had integration and completeness clauses which, in effect, superseded the prior oral agreement with Brown Forman’s predecessor.

What prompted the lawsuit was that Brown Forman decided to restructure its operations in Puerto Rico and offered Caribbean to serve as its exclusive broker, but this arrangement would have permitted Brown Forman to open a sales office in Puerto Rico. Negotiations failed and Caribbean brought suit in local court since removed to federal court. Caribbean asserted claims for breach of an alleged oral exclusive contract, wrongful termination under Law 21, breach of contract and breach of the duty of good faith and fair dealing. After holding a hearing on Caribbean’s application for a preliminary injunction and denying injunctive relief, the federal court (Besosa, J.) dismissed the Law 21 claim and ordered arbitration of the remaining claims.

The First Circuit agreed with the District Court that the Law 21 claim was not plausible on the facts alleged. The court, citing Puerto Rico Supreme Court precedent, noted that the elements of a Law 21 claim require obligations to promote and expand the market in a territory for the principal’s products in exchange for a commission, as well as an appointment of exclusivity.

First, the court concluded that the promotion agreements met none of the elements except the payment of commissions. Caribbean attempted to vary the clear terms of the agreements with extraneous evidence. Though the court recognized that the parole evidence rule had been repealed, in dicta, it suggested that the legal effect would be the same under Article 1233 of the Civil Code whose mandates requires observing the literal terms of a clear and unambiguous agreement. Even considering extrinsic evidence, the court concluded that Caribbean did not have authority to close sales orders on Brown Forman’s behalf, an essential element of a Law 21 claim, and did not allege sufficient facts to prove that the relationship was exclusive.

On the exclusivity element, the court held that it is “generally apparent either from the contract or from the arrangements agreed upon by the parties.” Where Iqbal comes in, is that the court concluded that the allegations of exclusivity were conclusory. There were no facts pleaded as to the scope of exclusivity and no allegation was made that Brown Forman had made any “assurances” that would support the contention that “no other sales representatives were allowed to sell the products in Puerto Rico.” The integration and completeness clauses were material to defeat the argument that extrinsic evidence existed that contradicted the plain terms of the promotion agreements (which were not exclusive on their face). On these facts the court affirmed the dismissal of the Law 21 termination claim of a purportedly oral exclusive agreement.

Turning to the arbitration issue, the court rejected the argument that the breach of contract claim arose from a non-arbitrable oral agreement. With the broad "arising under and related to" arbitration clause in the promotion agreements, all related claims of breach of contract and bad faith were arbitrable under the AAA in Louisville, Kentucky. The court held that all claims arose from the termination of the promotion agreements which have valid and enforceable arbitration clauses. As to the choice of forum, the court found that Caribbean had waived the argument that it was unenforceable under Law 21 for lack of a developed argumentation. As a matter of law, the court enforced the arbitration agreements and dismissed the claims.

Last but not least important, the court affirmed an award of attorney’s fees of $23,456 for temerity against Caribbean. It was significant to affirm the award under plain error review since Caribbean failed to object to the itemized and verified statement of fees. The court affirmed the judgment in its entirety.

A complaint with a Law 21 claim was properly removed to federal court after satisfying the minimum jurisdictional amount for diversity jurisdiction.

2010-11-23T14:45:00.002-05:00

I have witnessed a trend by franchisees, distributors, and sales representatives of doing everything in their means to avoid litigation in federal court of their claims brought under Laws 75 and 21. At first glance, the strategy seems perplexing particularly when there is a right to trial by jury in federal court (but not in local Puerto Rico courts); and generally, federal courts are quicker to judgment. Deep down, however, the issue of forum selection is more complex and the decision of where to sue is influenced by many factors. For example, local courts are more inclined to deny motions for summary judgment in part due to the Supreme Court of Puerto Rico’s procedurally stringent standard for summary disposition. By the same token, federal courts have developed over the years a body of jurisprudence in distribution cases that provide support for the granting of motions in limine to exclude or limit expert testimony and allow more readily summary judgment for principals in certain cases. Whether it is perception or reality the fact remains that Plaintiffs implement a number of tactics to avoid the federal court in these cases including the “fraudulent” joinder of a diversity-defeating co-defendant, a Puerto Rico distributor, or the subsequent filing of a similar action in local court when a “first-filed” case was pending in federal court against the same parties. And, suing for less than the jurisdictional amount may get a party out of federal court, too (or not!).

The case under discussion, Ramirez de Arellano v. Budenheim USA, Inc. 2010 WL 3810078 (D.P.R. Sept. 22, 2010)(Perez-Gimenez,J), presents the anomaly where the Plaintiff alleged that his damages were lower and the Defendant alleged that his actual economic damages were higher. There, Plaintiff, a sales representative in a case brought under Law 21, alleged on the face of the complaint less than the jurisdictional minimum of $75,000 when Law 21 would have allowed a claim for recovery of a greater amount of damages. Defendant removed the case to federal court. Plaintiff moved to remand alleging there was no subject matter jurisdiction. Defendant opposed the remand contending that, at relevant times, Plaintiff had a sales volume of $1.6 million and that Law 21 permitted recovery of 5% the total sales volume plus loss of goodwill and other damages.

Faced with conflicting allegations, the court determined that Plaintiff, who represented Defendant over a 20 year-relationship (presumably Law 21 would not have applied unless an extinctive novation occurred-an issue not addressed by the parties or the court at this time), would be entitled to potential recovery of at least $80,000. Since it is not a legal certainty that the claim involves less than the jurisdictional minimum, the court denied Plaintiff’s motion to remand and set a briefing schedule for Defendant’s motion to dismiss.

Another victory for principals: are forum selection clauses enforceable in Law 75 cases?

2010-11-17T15:25:00.001-05:00

Not automatically, but almost always. Puerto Rico Surgical Technologies, Inc. v. Applied Medical Distribution Corp., 2010 WL 4237927 (D.P.R. Oct. 26, 2010)(Pieras, J.) is no exception. There, the parties executed a distribution agreement with a California choice of law clause and a mandatory forum selection clause vesting California federal and state courts with exclusive jurisdiction. Plaintiff filed an action for damages under Law 75 in local court, which was then removed to federal court. Finding no difficulty in enforcing the forum selection clause under federal or Puerto Rico law, the court granted a motion to dismiss the complaint without prejudice. Distinguishing the First Circuit’s Combraco decision as dicta (reported in my previous blog) suggesting that Law 75’s public policy disfavoring litigation outside Puerto Rico may outweigh the federal interest in enforcing a forum selection clause, the district court held that enforcement of the forum selection clause in this case did not contravene an important public policy of Puerto Rico, was negotiated freely, and was not otherwise unreasonable. At least where the parties and the facts underlying the claims have a sufficiently close nexus to California, the court will not invalidate a forum selection clause simply because of Plaintiff’s inconvenience in litigating outside Puerto Rico.

Puerto Rico's Dealer and Franchise Statute Adapts to the Latest Developments in Law, Commerce and Technology

2010-10-13T19:37:00.000-04:00

My partner Manuel Pietrantoni and this author published the referenced article on Law 75 in Volume 30, Number 1, of the Franchise Law Journal of the American Bar Association (Summer 2010). The legal currents under Law 75 addressed in the article include transfers, assignments or acquisitions, product sales diversion, constructive termination and preemption under federal copyright and trademark laws.

For those curious about the topics covered in the article, feel free to contact us at mpietrantoni@cabprlaw.com or rcasellas@cabprlaw.com

Stay current stay relevant!

Puerto Rico’s Legislature moves to regulate franchising: is Law 75 inadequate?

2010-10-10T15:00:00.000-04:00

El Nuevo Dia, Oct. 9, 2010 at 44, reported that representatives of a group of eight McDonald’s franchisees testified at a Commission of the House of Representatives to urge the passage of legislation to regulate unfair franchising practices. The hearing came about because McDonald’s franchisor sold its franchise rights or assets in Puerto Rico to “Arcos Dorados” an entity who is said to have refused to renew the franchise agreements and retaliated against the eight franchisees that complained to the press about alleged abusive franchising practices. There is ongoing litigation in Puerto Rico’s Court of First Instance, San Juan Part over this subject matter, including allegations that Arcos Dorados has failed to participate in coop advertising programs and allowed the establishment of competing restaurants in the territories of the existing franchisees. The Committee’s President allegedly remarked that the need to regulate franchising in Puerto Rico is “urgent and necessary.”

Is it urgent and necessary? Many states have statutes with disclosure requirements when franchisors offer to sell franchise rights for a fee. But problems with disclosures do not appear to be prominent in the McDonald’s dispute, at least as far as we are able to tell from the article. Many statutes in the states similar to Law 75 regulate abusive or unfair practices in dealer relationships, including franchising. Is the necessity to regulate a franchise based on a perceived notion that retail food establishments lack the protection of dealers under Law 75? It could be. But, there is no hard, fast, and absolute rule or statutory exclusion that retailers do not qualify for protection as Law 75 dealers. Who is a dealer turns on the facts and circumstances of each case. Is there another concern that an acquiring franchisor (or the seller) may impair at will the existing franchise agreements without violating Law 75? On this point there is a body of developed case law under Law 75 defining the rights and obligations of those selling and acquiring dealership rights.

Before the Legislature moves hastily to pass legislation it should consider whether or not Law 75, as enacted, is sufficient to protect the rights of franchisees.

“Muddied waters” or not, Law 75 claims for termination of exclusive distributorship and tort damages are arbitrable

2010-09-27T22:33:00.003-04:00

It is unremarkable that the Federal Arbitration Act enforces written arbitration agreements involving Law 75 claims. Unless the movant (the dealer) seeks to invoke the district court’s limited power to issue a Teradyne injunction in aid of arbitration, claims for injunctive relief fall in the hands of the arbitrator. Next Step Medical Co. v. Johnson & Johnson International, No. 09-2077 (1st Cir. Aug. 30, 2010) is one of those cases. What is peculiar about the case is the appeal from the District Court’s judgment dismissing with prejudice a tort claim for emotional distress as not viable in a contract action, despite a Magistrate’s prior recommendation that the entire action was arbitrable. Despite the First Circuit's statement that the district judge “muddied the waters” by dismissing the arbitrable claims with prejudice, the appellate court sanitized the Judgment and concluded that the dismissal with prejudice meant the claims could not be brought in court; but rather, the claims survived on the merits for arbitration. After a removal to federal court, a still born request for injunctive relief, the lost appeal, years of litigation, the dealer was forced to arbitrate as required by the clear and broad arbitration agreement.

First Circuit enforces forum selection clause in agreement protected by Law 21

2010-09-17T08:06:00.000-04:00

Puerto Rico Law 21 protects sales representatives from unjustified actions by their principals, much like Law 75 protects dealers. Law 21 provides that, regardless of a contractual provision to the contrary, sales representation agreements covering the Puerto Rico territory shall be governed by Law 21 and no such agreement can be terminated without just cause.

The agreement in the case had both a choice of law clause providing for North Carolina law and a compulsory choice of forum provision for litigation in North Carolina. The principal terminated the agreement and, after removal of the dealer’s complaint to federal court, the district court enforced the choice of forum clause granting a Rule 12b6 motion and dismissed the action without prejudice.

In Barril v. Combraco Industries, No. 09-2163 slip op. (Sept. 8, 2010), the First Circuit affirmed. The court followed the federal standard in Bremen v. Zapata, 407 U.S. 1 (1972), and skirted the issue whether enforcement of a forum selection clause is procedural or substantive, noting that both Puerto Rico and North Carolina follow the Zapata standard. Appellant argued that enforcement of the clause, under Zapata’s fourth prong, was invalid because it contravened the strong public policy of the forum behind Law 21. The court disagreed. The court noted that Law 21 does not by its terms forbid the enforcement of a choice of forum clause, but only a choice of law clause insofar as it “would prevent Law 21’s substantive protections from being given effect.” (citation omitted). The court rejected the argument that North Carolina law precludes courts from giving effect to the laws of another state or territory, so that North Carolina courts are just as capable to enforce Law 21 to the extent that it otherwise applies despite the choice of law clause.

Author’s note: Combraco paves the way to enforce choice of law clauses of states other than Puerto Rico to the extent those laws otherwise apply. PR Law 21 presumptively governs the substantive aspects of the contract’s termination and resulting damages, but other substantive aspects governing other claims or the interpretation of the agreement would be governed by the chosen law when not offensive to Law 21. As to Law 21’s preemption, the analysis is circumscribed to contractual provisions that render Law 21’s substantive protections inoperative. That is, where an agreement permits termination without cause or disallows any recovery of compensatory damages to an exclusive sales representative there would be preemption under Law 21. Where the agreement is not contrary to express substantive provisions in Law 21 (or Law 75 for that matter) or when consistent with those laws, it is likely that the chosen law of another state will apply to govern the enforcement of those other provisions in the agreement. If the agreement were to be governed by Puerto Rico law, then the Civil Code, or other provisions of the Commerce Code, would oversee the enforcement of provisions not expressly governed by Laws 21 or 75. An example is the Supreme Court of Puerto Rico’s recent case holding that the enforcement of a non-compete provision in a franchise agreement (to which Law 75 applies on its face) is governed by the Civil Code as Law 75 is silent on the issue. With Combraco, it remains to be seen if there is a change in the body of federal cases enforcing forum selection clauses despite Law 75’s express prohibition and what weight will be given to Law 75 under Zapata. My prediction is that the strong federal law interest to enforce reasonable forum selection clauses under Zapata (and the Federal Arbitration Act when the clause requires arbitration outside Puerto Rico) will continue to continue to override Law 75’s public policy interests.

Appeals Court affirms judgment under Law 75 awarding damages for five-years of lost benefits and goodwill to exclusive distributor for constructive termination or impairment.

2010-08-29T11:25:00.003-04:00

Appellate court decisions in Puerto Rico are persuasive authority in the application and interpretation of Law 75. One such case is Cadierno Corporation v. Rowland Coffee Roasters, 2010 WL 3168203 (TCA April 30, 2010) where plaintiff Cadierno, an exclusive distributor of branded Café Estrella premium coffee, brought a claim for damages under Law 75 against its principal Rowland when the latter introduced Café Pilon, an essentially identical branded premium coffee, through a subsidiary at prices below the distributor’s costs. The distributor opened the market and clientele for Café Estrella, as the exclusive distributor, with the expectation that, once a controversy as to the ownership of the Café Pilon brand was resolved, it would also distribute Café Pilon in Puerto Rico. The parties negotiated the exclusive distribution of Café Pilon, but did not reach an agreement. After Rowland introduced Café Pilon in Puerto Rico through a subsidiary at predatory prices, the distributor decided to discontinue purchases of Café Estrella for it alleged that it was driven out of the market and sales of Café Pilon has in effect cannibalized sales of Café Estrella.

Claiming that the principal’s acts impaired and terminated the exclusive relationship by appropriating the goodwill and clientele created for Café Estrella, the distributor sued in local court under Law 75. After trial, the local court (Bayamon Part) found in favor of the distributor, credited the testimony of the distributor’s expert (Ronald Martinez), and awarded damages for lost benefits, loss of goodwill, attorney’s fees and costs.

Interestingly, the distributor’s expert computed lost benefits from the impairment based on the criteria normally used in termination cases under Section 278c, by computing profits on the line for the prior five years and discounting, as mitigation, the profits realized on sales of Café Estrella until the distributor abandoned the line.

The principal challenged on appeal the sufficiency of the evidence of impairment and constructive termination; the finding of lack of just cause; the determination of damages from the trial court’s decision not to impute fixed and administrative costs from the award of damages; the finding of loss of goodwill; finally, it contested the imposition of attorney’s fees, expert witness fees and costs.

The principal lost as the appellate court affirmed the judgment on all counts. The court held that the decision to introduce Café Pilon, a premium coffee that was substantially the same as Café Estrella, through a subsidiary at prices below the distributor’s costs impaired the exclusive contract over Café Estrella and caused damages to the distributor in violation of both Law 75 and the principle of good faith and fair dealing.

Note: Cadierno reinforces Law 75’s remedial purpose when the principal seeks to appropriate the clientele and goodwill created by the exclusive distributor by introducing a new brand or product line extension through a third party or an affiliate. It is even more significant considering that the distributor abandoned the line voluntarily and was not terminated in fact by the principal. It should be noted that Cadierno finds an impairment of an exclusive contract although the parties had not reached an agreement over the new brand or product line extension. The impairment with the exclusivity over Café Estrella came about because of cannibalism that resulted when the principal introduced Café Pilon to compete and displace Café Estrella in the territory. Finally, Cadierno validates the distributor’s expert’s methodology that five-years of benefits are not limited to termination cases.

Impairment, de facto exclusivity, nature of relationship, business terms after expiration of written agreement and assumption by successor in interest, present triable issues of material fact precluding summary judgment for the principal under Laws 75 and 21.

2010-07-29T15:45:00.000-04:00

Beatty Caribbean, Inc. v. Nova Chemicals, 2010 WL 2697163 (D.P.R. July 6, 2010)(CVR), underscores the risks under Puerto Rico’s distribution laws that a principal assumes from doing business with an agent after expiration of a written agreement.

Beatty filed suit in federal court for impairment of an alleged verbal exclusive agreement when the principal, the successor in interest, sought to reduce the payment of commissions on the sale of Styrofoam products from 5% to 3% allegedly without just cause under Laws 75 and 21.

Beatty had been a non-exclusive representative of non-party Arco under a written agreement for many years until defendant NOVA later acquired Arco’s assets in 1996. The agreement provided a 5% commission and had a term of one year. Beatty’s 1990 agreement with Arco was not part of the assumed contracts in the acquisition.

Without entering into a new written agreement and not expressly assuming the expired contract between Arco and Beatty, NOVA and Beatty allegedly entered into a verbal exclusive agreement in the 1990’s. Beatty’s proof of exclusivity relied on a course of dealings as it alleged that it was de facto the sole distributor in the Caribbean and Puerto Rico and NOVA had not appointed another distributor in the exclusive territory. The court found it was undisputed that when NOVA acquired Arco’s assets “there was no change or alteration in any of the terms and conditions of dealings with Beatty.”

Nova moved for summary judgment on two grounds, one that Beatty did not qualify as a Law 75 dealer and two, it was not an exclusive sales representative for coverage under Law 21. The court found there were controversies of material fact precluding summary judgment. “Since there is no written contract in effect as to what was the extent, provisions or understanding of the verbal contract between the parties in the present controversy, once it is ruled and determined based on credibility determination, it would then be legally possible to determine if their business relation may fall under Law 75 or 21, or none.”

Where there is no integrated written and expressly non-exclusive agreement in effect at the relevant time of the impairment or termination by the successor in interest, this and other cases prove that an agent claiming protection under Laws 75 and 21 may avert summary judgment with extrinsic evidence of a verbal distribution or representation agreement and a course of dealings of de facto exclusivity.

AAA Arbitration Damages Award under Law 75-republished

2010-07-13T11:30:00.000-04:00

In a previous blog on June 12, 2009, I commented about a final award in a Law 75 dispute issued by a three-member Panel under the auspices of the AAA. While arbitration awards have no precedential value beyond the parties or their privies in the dispute, a Panel’s reasoning may be persuasive in cases brought under Law 75. Arbitration awards may be publicly available through special databases in Westlaw and Lexis. The award at issue here was filed in a subsequent enforcement proceeding in federal court and is republished in full in the link below.

http://comunidad.microjuris.com/federalbarpr/2008/11/20/arbitration-mendez-co-inc-v-plumrose-usa-inc/

Does Law 75 govern the validity of a non-compete obligation in a franchise agreement when it does not specifically regulate the conduct at issue?

2010-07-01T11:06:00.004-04:00

Plain language provides that a “distribution contract” includes the relationship established to distribute merchandise or provide a service by means of a “concession” or a “franchise” in the Puerto Rico market. 10 L.P.R.A. Sec. 278(b). It is plain that Law 75 applies to a franchise agreement.

But does Law 75 regulate the enforceability of contractual provisions in a franchise agreement without the triggering event of a termination or impairment or where Law 75 is silent on the issue?

At least with respect to a non-compete obligation in a franchise agreement, the answer is No. In Franquicias Martin’s BBQ v. Garcia de Gracia, 2010 TSPR 71 (P.R. May 10, 2010), the Supreme Court of Puerto Rico invalidated a non-compete provision in a franchise agreement, not under Law 75, but applying the Civil Code. The Civil Code provides that agreements are enforceable on their terms unless contrary to good faith, "morals" or public policy. Finding no provision in Law 75 that regulates the validity of a non-compete agreement, and suggesting that Law 75’s public policy is not implicated without an unjustified termination of the agreement, the court turned to the Civil Code, which is the primary source of law.

In the opinion, the court relegated Law 75 to a footnote (n. 10): “Law 75 of June 24, 1964, as amended, 10 L.P.R.A. Sec. 278, is limited to regulating the termination or non-renewal of a distribution contract without just cause, and is applicable to those persons that fit within the imprecise definition of a distributor.” (translation ours).

The court could not have meant that Law 75 does not apply to franchise agreements because the statutory definition of distributor is “imprecise”. After all, plain language in Law 75 includes a franchise relationship within the definition of a distribution contract.

What the court does suggest is that Law 75 does not come into play merely because a distribution or franchise agreement is at issue in the case. The court’s opinion suggests that Law 75 would not apply where: 1) the agreement has not been impaired or terminated without just cause, or 2) there is no provision in Law 75 specifically governing the legality of the contested provision at issue (in that case, the non-compete obligation).

Thus, for example and consistent with existing case law, a provision in a distribution agreement allowing the unilateral or automatic termination, non-renewal, or expiration of the agreement clashes with the specific provision in Law 75 expressly requiring just cause. Law 75 would apply in that situation as the contractual provision violates the statute and public policy requiring just cause.

On the other hand, the court’s opinion leaves room for argument that, where Law 75 does not specifically “preempt” or “regulate” the provision at issue in a franchise or distribution agreement, Law 75’s public policy is not at stake simply because there has been an unjustified termination, impairment or non-renewal of the agreement. Thus, in that scenario, the Civil Code remains the primary legal source to determine the enforceability of a contractual provision that is not specifically governed by Law 75. A narrow exception may be an arbitration provision which is governed solely and preempted by the Federal Arbitration Act and the Supremacy Clause although Law 75 regulates the enforcement of arbitration clauses in distribution contracts.

Applying the Civil Code may have important repercussions on the outcome of a franchise or distribution dispute. The Civil Code presumes both the existence of good faith and the validity of contractual obligations. The burden of proof is on the party challenging the enforcement of a contract.

It remains to be seen how far the court's footnote goes in determining the rule of decision in franchising and distribution issues under Law 75.

Whether a non-compete obligation in a franchise agreement is enforceable under Puerto Rico law depends on the reasonableness of the restriction as applied to the facts of each case.

2010-06-25T08:44:00.006-04:00

In Franquicias Martin’s BBQ Inc. v. Luis Garcia de Gracia, No. 2009-0410 (P.R. May 10, 2010), the Supreme Court of Puerto Rico considered the validity of a non-compete provision in the context of a franchise agreement.

The court determined that Puerto Rico Law 75, which regulates distribution and franchise relationships from unjustified terminations, did not specify the norms by which to determine the validity of a non-compete obligation. Nor does Law 75 invalidate per se a non-compete obligation. For guidance, the court turned to the Civil Code’s general precept that contractual obligations are enforceable unless contrary to public policy. Finding no statutory prohibition against the enforcement of non-compete obligations, the court adopted the criteria to validate a non-compete in employment relationships.

The court set forth a four-part test to determine the validity of a non-compete obligation in a franchise agreement. First, does the franchisor have a legitimate interest in the non-compete obligation, so that its business would be substantially affected without the restriction? A relevant factor is the employee’s position and his or her ability to be able to compete against the employer in the future. Second, the scope of the restriction must be reasonable in terms of the employer’s interests, the object, place, time and clients affected. The object must be limited to activities “similar” to those carried out by the employer. Third, the term of the restriction should not exceed 12 months. When the restriction applies to a geographic area, it must be limited to that strictly necessary to prevent “real competition” with the employer. When the restriction limits the scope of clients, it must be to those that the employee serviced personally and were clients of the employer before the employee’s resignation or termination. Finally, the employer must offer some consideration as a quid pro quo for the non-compete.

On the facts of the case, the franchisor, a rotisserie-style fast food restaurant chain, established a reasonable restriction of two years (it was not per se illegal to exceed the 12 month limitation) and limited the sale of products to those “similar” to the rotisserie chicken sold by the employer. It was unreasonable, however, as the non-compete prohibited the operation of a similar business within ten miles of any restaurant of the franchisor when the employee’s competing restaurant, established in the same location previously operated by the franchisor, had only a two mile radius of operations. The court did not explain the basis supporting the conclusion that the former employee's restaurant had a two mile radius of operations. In any event, the court determined that the prohibition in the contract was on its face broader than reasonably necessary for its admittedly legitimate purpose, could not be saved, and invalidated the entire non-compete agreement as contrary to good faith and public policy.

It is debatable whether the court's decision provides certainty and uniformity by which to guide contracting parties in the future or whether it is likely to cause confusion and litigation. Given the factually intensive and variable nature of the inquiry, it is probable that litigation will be both inevitable and costly to enforce a non-compete in a franchise or distribution agreement.

Judge Richard Posner of the U.S. Court of Appeals for the Seventh Circuit speaks candidly (if not controversially) about the current economic crisis and the financial markets in the United States at the Judicial Conference for the First Circuit held on May 13-14, 2010. What’s the relevance for Law 75?

2010-05-16T21:41:00.003-04:00

What relevance could a conference about economics by a distinguished jurist have with the regulation of dealer contracts in Puerto Rico?

I was critical in my blog recently about the position espoused by an economics professor at another judicial conference a few weeks back favoring the repeal of Law 75 because of it allegedly causes artificially high consumer prices and hampers economic progress. My criticism was that proposals to amend or repeal legislation must be substantiated with reason in the facts and sound economic analysis.

Judge Posner seems to favor the Keynesian theory that market forces act on their own to correct irregularities in the financial markets and that more (or hastily-enacted regulation) is not the right answer.

Judge Posner described three fallacies that have been named to explain the situation with the financial markets in the United States, one, that the collapse was caused by over “greedy bankers”, second, that the recession ended last fall, and third, that there is a need for more regulation. In his view, Posner opined that the financial collapse was caused by various factors, including a freeze in consumer spending, heavy debt and unequal distribution of wealth, bad monetary policy, bad regulatory policy, and bad economists.

Judge Posner pulled all the stops when he blamed top-level regulators for the current financial crisis. He blamed Congress for an inept reaction or overreaction to the crisis. All congressmen and senators, except Barney Frank, know little or nothing about economic theory, Posner said.

Posner believes that the root of the current financial crisis (and the worst recession since the 1930’s) dates back to 2001 when the Federal Reserve substantially reduced short term interest rates. This caused mortgage rates to fall. Housing prices increased. A “bubble” was formed when adjustable rate mortgages made 100% financing possible and increased artificially the demand for housing. When the bubble burst in 2004, housing prices fell and this sent millions of people who had no equity to abandon their homes they could no longer afford. The banking industry and the financial markets that had heavily invested in housing collapsed. Posner opined that the government bailout of the financial institutions was necessary to prevent a bigger crash.

Finally, Posner believes there are impediments to short term economic recovery:

---Credit remains tight.
---Housing prices remain low.
---Unemployment remains high.
---The European financial crisis (and Greece’s financial collapse) will impact the U.S. economy.
---With the value of the Euro declining, U.S exports become more expensive.
---States and Cities in the U.S. remain in precarious financial positions or are bankrupt.
---The national debt in the U.S of 8 trillion dollars continues to rise.

In short, Posner believes there is no need for the creation of new government regulatory agencies and to pass hasty regulations to address the current economic situation.

As to Law 75. The same concern applies to those that are quick to single-out Law 75 as an evil for economic development in Puerto Rico and should be repealed. To state what should be obvious, no legislation should be passed or repealed without sound and reasoned analysis.

An “epic battle” over exclusive distribution rights under Law 75 comes to a close with a stalemate: the Kellogg and B. Fernandez dispute.

2010-05-12T07:50:00.000-04:00

The dispute generated no less than multiple published cases in the federal court in Puerto Rico, two appeals on jurisdictional issues in the U.S. Court of Appeals for the First Circuit, and related litigation in Michigan state court. The matter came to a head in B. Fernandez v. Kellogg USA, 2010 WL 376326 (Jan. 27, 2010 D.P.R.)(Gelpi, J.) where on the eve of trial the court granted and denied in part Kellogg’s motion for summary judgment and denied B. Fernandez’ motion for summary judgment. It should be disclosed to our readers that I was lead counsel for Kellogg in those cases.

Since the mid 1900’s, B. Fernandez had been, and still is, a distributor of Kellogg cereals in Puerto Rico. Since the 1960’s up to 1992, written agreements defined the commercial relationships between the parties. All the written agreements were non-exclusive. In 1992, the last written contract expired on its own terms without it being renewed or replaced by a new agreement. The relationship continued on the same terms and conditions, except that in 2003 Kellogg paid commissions to B. Fernandez for direct sales of certain Kellogg cereal products and the parties made other changes in their business dealings. B. Fernandez alleged that the relationship after 1992 became de facto exclusive as recognized by the absence of competing distributors and the payment of commissions. In 2004, B. Fernandez transferred title over the inventory of Kellogg cereals to the Puerto Rican Kellogg affiliate. The inventory repurchase agreement expressly ratified the continued validity of the non-exclusive 1992 agreement. As part of that transaction, Kellogg USA, the principal in the distribution relationship, assigned the 1992 agreement to Kellogg Caribe.

B. Fernandez filed suit claiming an impairment of exclusive rights in violation of Law 75 and fraudulent inducement of the inventory contract when Kellogg started to sell certain cereal products directly in Puerto Rico. Kellogg moved for summary judgment claiming that Law 75 did not apply retroactively to the relationship that began decades before the enactment of Law 75 in 1964, there was no extinctive novation, and there was no legal basis for a claim of fraudulent inducement. B. Fernandez moved for summary judgment for the court to declare that the relationship was exclusive.

After 15 rounds of fierce litigation, the court declared a draw. The court dismissed the fraudulent inducement claim finding it hard to believe that B. Fernandez, a sophisticated business entity assisted by counsel, could allege to have been misled into transferring the inventory. As to whether Law 75 applied or not, the issue became more complex. First, the court determined that there was a factual dispute concerning the validity of the assignment of rights in the inventory contract. Thus, the court could not give conclusive effect, without a trial, as to the representation in the inventory agreement ratifying the non-exclusive agreement of 1992 (and this would have been proof that no extinctive novation occurred). The court then concluded that it could not determine summarily that Law 75 did not apply because there was a factual dispute as to extinctive novation. Finally, the court determined that whether or not on these facts the relationship was exclusive was a triable issue for the jury. In a separate opinion, the court dismissed a Law 75 claim by CWL, an affiliate of B. Fernandez and logistics provider, for it did not qualify for protection as a dealer under Law 75 and the relationship without a fixed term was terminable at will.

Reseller mounts a preemptive strike for collection of monies and declaratory relief under Law 75 against its distributor and wins in federal court despite a related action in local court.

2010-04-20T17:29:00.001-04:00

In Lamex Foods Inc. v. Audeliz Lebron Corp., 2010 WL 500405 (D.P.R. Feb. 5, 2010)(JAF), the court turned a deaf ear to a distributor's claim under Law 75 to excuse compliance with its obligation to pay for goods sold and delivered.

Plaintiff, a reseller and broker of food products in the U.S., sued its alleged distributor of frozen foods in federal court on three counts, one, collection of monies against the distributor corporation and its principals in their personal capacity on an alter ego theory, two, for preliminary and permanent injunctive relief to censure "false representations" about plaintiff, and three, for declaratory judgment that plaintiff is not liable under Law 75.

The court held an evidentiary hearing on the request for preliminary injunctive relief and, absent any objections by defendant, consolidated the hearing with a bench trial on the merits. It does not appear that defendant raised any constitutional objections to the scope of an injunction that would have the effect of censuring commercial speech.

On a side note, the court observed that defendant's claim under Law 75, which was pending in local court, was that an "exclusive verbal agreement" existed. While the court noted that Law 75 does not require the formality of a written instrument confirming exclusivity, citing RW v. Welch, 13 F. 3d 478 (1st Cir. 1994), the court found the allegation to be suspect as "strain[ing] the imagination" absent any written confirmation or support for the allegation over a period of months if not years.

The dispute arose over defendant's late payments and subsequent delinquency to pay outstanding invoices for goods sold and delivered exceeding $1.2 million. Plaintiff then froze defendant's account for non-payment.

In an interesting twist, plaintiff then attempted to have another distributor Trafon Group resell the poultry products in Puerto Rico, until Trafon declined upon receipt of a claim letter from defendant threatening suit and plaintiff's inability to defend and hold Trafon harmless. This incident was part of the basis of plaintiff's claim that defendant was engaged in a "smear campaign".

Litigation in both federal and local court ensued. In local court, the distributor filed a Law 75 suit and sought to deposit in court monies due plaintiff. At a status conference, the federal court (Fuste, J) warned defendant that it viewed "the litigation strategy as one merely meant to delay and to frustrate a good-faith resolution of the matter."

This was a revelation of things to come.

After a bench trial, the court ruled in plaintiff's favor. First, the court held that, based on a factual stipulation, the money was due and owing. The defendant’s "meritless" Law 75 claim could not serve to condition the obligation to pay. The court ordered the local court to disburse and release funds due plaintiff. The court also awarded damages consisting of cold storage costs for merchandise sold but undelivered to defendant because of its delinquency in payments.

On the claim to pierce the corporate veil the court determined that plaintiff had produced no evidence that the defendant corporation would be unable to meet its financial obligations. Thus, it dismissed under Puerto Rico law the alter ego theory to reach the individuals.

As to Law 75, the court concluded that the relationship, on a purchase order basis, was not protected under Law 75. The court reasoned that plaintiff "deals with various clients in Puerto Rico and does not rely on [defendant] to create a market for its services."

As to the claim for injunctive relief, the court found that isolated conduct informing the nature of the legal dispute was insufficient to warrant injunctive relief. Anticipating a potential constitutional issue, the court noted that plaintiff failed to specify the "legal right" that the behavior is said to violate.

In sum, the court ordered defendant to pay the principal amount due, damages incurred, plus interest, less amounts collected by plaintiff from a line of credit and the amounts deposited in local court.

NOTE: In Lamex Foods v. Audeliz Lebron, No. 10-1677 (1st Cir. June 27, 2011), the First Circuit vacated the District Court’s (Fusté, J.) Judgment holding that consolidation of a preliminary injunction hearing with a bench trial on the merits without providing adequate and clear prior notice violated the constitutional right to a jury trial. Thus, the court vacated the judgment with respect to the claims for declaratory relief and to pierce the corporate veil and remanded the action for further proceedings. Significantly, because Defendant conceded the amount and existence of the debt owed to Plaintiff, it affirmed the court’s monetary judgment in Plaintiff’s favor. As to the appeal from a discovery sanction, the court affirmed the court’s imposition of sanctions against Defendant for its President’s evasive and non-responsive answers during his deposition.

Law 75 comes under attack at a conference ….and this is not the final chapter

2010-03-21T13:49:00.001-04:00

Last week, the Foundation of the Federal Bar Association, Puerto Rico Chapter, and the Foundation of the Historical Society of the Supreme Court of Puerto Rico sponsored a conference on Judicial Independence and Economic Development in Puerto Rico. Among the panelists were distinguished practitioners, Judge Cabranes of the U.S. Court of Appeals for the Second Circuit, and a professor of economics at the graduate school of the University of Puerto Rico. Among those attending were Justices of the Supreme Court of Puerto Rico, Judges of the U.S. District Court for the District of Puerto Rico and members of the federal bar.

The theme of the presentation was to establish a positive correlation between states and countries that have a strong and independent judiciary that values observance of the rule of law and economic development. It is not surprising, but disappointing, that such an important conference has received so far no coverage in the press.

Law 75 has come under attack almost since its inception in 1964 as a protectionist statute. Some court decisions and commentators have objected to the statute as being anti-competitive. Law 75 has thus far survived constitutional challenges under the Due Process Clause, and the Dormant Commerce clause including arguments of preemption under federal trademark and antitrust laws.

With the globalization of commerce it is hardly surprising that Law 75, as many other laws that are perceived to act as obstacles to freedom of commerce, will come up on the radar screen as it did at the conference last week. To a packed house full of lawyers, judges and possibly legislators, the economics Professor espoused the repeal of Law 75 as creating intrabrand monopolies and as harmful to economic development. The Professor concluded that Law 75 causes artificial increases in the prices of goods and services to consumers. He described an experience in Uruguay that repealed a law similar to Law 75 and stated that the Dominican Republic also repealed its dealer protection statute (an assertion which I believe may be factually erroneous). At least 18 states of the Union and many countries still have laws similar to Law 75.

When asked to provide empirical economic support for his conclusions, the Professor admitted that he had conducted no analysis, and knew of no study, that supported his conclusion that Law 75 causes or contributes to price differentials of goods and services between Puerto Rico and the continental United States. He said that the distribution industry was opposed to conducting studies as if to suggest there is something to hide. What precludes the academic world from doing the research independently is odd!

The Professor was unable to reject other plausible and independent explanations; that is, that price differentials may arise from unrelated market conditions, such as the imposition of high tax rates on both imports and the sale of goods to consumers (the exorbitant taxes to luxury vehicles are but one example), and other high fixed costs on imports (e.g., freight and insurance costs). Further, the Professor assumed that intrabrand monopolies created by exclusive distributorships are inherently pernicious to consumers when that is not necessarily so. For one thing, the antitrust laws are primarily concerned with interbrand not intrabrand competition. When a distributor prices a product or service above its competitive level, the elasticity of demand dictates that consumers will change their spending and consumption patterns toward another brand or service. That sort of explains why the pricing points at the supermarket of Coke and Pepsi, for example, are basically identical even as some consumers may stick to their brand despite price increases (up to a point). Absent collusion between manufacturers of competing brands or products, from an economics standpoint, the distributor that uses its intrabrand monopoly to reap higher profit margins will be forced by the market to lower its prices in order to remain competitive. On the other hand, exclusive distributorships help to eliminate “free-riding” by other dealers and theoretically require the exclusive dealer to do more to promote the sale of the principal’s products. And, contrary to popular belief, Law 75 protects but does not require exclusive distributorships.

Without reliable economic research, it is easy if not irresponsible for one to advocate the repeal of Law 75 as not serving the public interest. It remains to be seen if any lasting impressions have been left on the policy makers attending the conference by the facially appealing, but superficial, viewpoint of the Professor that Law 75 acts a barrier to economic development in Puerto Rico.

Part 2: Is a constructive or de facto termination of a distribution agreement actionable under Law 75 after the Supreme Court’s decision in Mac’s Shell Service v. Shell Oil Products?

2010-03-06T12:06:00.003-05:00

In Mac’s Shell Service v. Shell Oil Products, No. 08-240, slip op. (March 2, 2010), the Supreme Court of the United States held that a constructive termination claim was not actionable under the PMPA, the federal law protecting petroleum franchisees, unless the retailer-operator voluntarily has abandoned the franchise. The Court reasoned that both the plain language of the PMPA, and analogous federal employment law jurisprudence, do not support the First Circuit’s reasoning that a franchisor’s breach of an essential contractual term made it actionable as a constructive termination under the PMPA. The PMPA’s comprehensive scheme for compensation, including awards of punitive damages for violations, also made the Court reluctant to expand the reach of the statute for all breach of contract claims. A termination claim under the PMPA, said the Court, requires an end to the relationship of the parties. While the Court refused to federalize claims not involving a complete rupture of the business relationship, the Court held that the PMPA does not disturb state laws that provide remedies for wrongful practices, including a franchisor’s breach of contract short of termination. Thus, the Shell Oil Products decision does not foreclose claims under Puerto Rico law for de facto or constructive termination of franchise and distribution agreements.

That’s where Law 75 comes in as it was enacted to compensate for abusive practices by principals designed to appropriate the goodwill created by the Puerto Rican distributor. And, Puerto Rico’s Article 1077 of the Civil Code supplements the remedies available for resolution of contracts arising from breaches of essential and material terms.

Specifically, the type of claim that was not actionable in Shell is actionable on the face of Law 75 as it codifies a claim for impairment of contractually acquired rights and expectations short of a complete cessation of the relationship (a “menoscabo”). Moreover, Law 75’s definitions of termination without just cause and the measure of damages for termination expressly include a remedy for acts detrimental to the established relationship (“menoscabo”). Thus, from Law 75’s plain language and its interpretive case law (including a series of federal cases and the PR’s appellate court’s opinion in Maderas Alfa), a principal’s impairment of an established relationship with the distributor may operate as the functional equivalent of a termination requiring consideration of the statutory criteria for termination damages, including loss of goodwill and five-years of lost profits, among other factors. Compare Maintainco, Inc. v. Mitsubishi Caterpillar Forklift, CCH Business Franchise Guide ¶14,195 (holding that a dealer's loss of an exclusive territory, in and of itself, could qualify as a constructive termination under New Jersey’s Franchise Practices Act which, like Law 75, requires good cause for termination; affirmed the trial court’s ruling and its award of compensatory damages for lost profits to the dealer in the amount of $679,414. Additionally, the trial court's substantial award of attorney fees to the dealer in the amount of $3,533,642 was also upheld, but an award of $477,611 in expert witness fees was reversed).

Do commission payments to a distributor for direct sales made by the principal create an exclusive distribution relationship under Laws 75 or 21?

2010-02-15T16:07:00.003-05:00

An exclusive distribution relationship may be established by: 1) an expressly exclusive written distribution agreement, or 2) in the absence of an integrated written agreement, by evidence of a verbal exclusive agreement or a course of dealings or course of performance between the parties establishing de facto exclusivity.

At least where an expressly non-exclusive agreement is in effect between the parties, courts have ruled that the payment of commissions is not evidence that the principal has waived its right to sell products directly or through another distributor in competition with its alleged exclusive distributor. In Print, Medical Books Inc. v. Harcourt, Inc. 93 Fed. Appx. 240, 241, 2004 WL 528433, 1 n.1 (1st Cir. 2004)(unpublished)(“The plaintiff contends that the payment of a 10% override commission on all direct sales by the defendant in Puerto Rico rendered the distribution agreement exclusive. We do not agree. The essence of a non-exclusive agreement is that the manufacturer (or, as here, the publisher) retains the right to sell its wares to others, including other distributors, as it sees fit. [citation omitted]. The defendant at all times retained that right”).

Things get like quick sand for the principal, where there is no written agreement or a material factual dispute exists as to whether a non-exclusive written agreement continues to govern the relationship between the parties.

In those circumstances, a distributor has been able to avert the entry of summary judgment on the issue of exclusivity with an argument that, over a period of years, it has been the sole reseller of the principal’s products in Puerto Rico or the principal has paid a commission for selling products directly. Kellogg USA v. B. Fernandez, 2010 WL 376326 (D.P.R. Jan. 27, 2010)(Gelpi, J.)(Out of full disclosure the author represented Kellogg in that case). The distributor’s argument in that case was that the principal would not have been contractually obliged to pay any commissions if the relationship had been non-exclusive. The court decided that this allegation created a triable issue of fact. On the other hand, if the court hit it on the spot in In Print, Medical Books Inc. v. Harcourt, Inc., the payment of commissions would not necessarily create exclusivity as the principal acted consistently with its right to sell directly, which is the essence of non-exclusivity. In other words, paying commissions does not indicate the principal's intent to renounce its right to sell directly. By the same token, there is an equally permissible inference from the one drawn by the Kellogg court that the distributor waives its claim of de facto exclusivity by permitting others to sell directly even when accepting the payment of commissions. Unless, of course, in that case the principal clearly has manifested its intent to agree to pay commissions in recognition of the distributor’s exclusive rights.

Amendments to the Rules of Evidence of Puerto Rico may become outcome-determinative with respect to the admissibility and weight of expert testimony in commercial litigation, including Law 75 cases.

2010-02-06T10:23:00.001-05:00

For those who think that a local court in Puerto Rico is necessarily more favorable to a principal in Law 75 cases simply because there is no right to trial by jury, think again, after the recent amendments to the Rules of Evidence of Puerto Rico.

The Amendments conform to the structure and numbering of the Federal Rules of Evidence, but some of the changes are substantively far-reaching. One of those changes turns on the admissibility and weight of expert testimony. Significantly, the Puerto Rico evidentiary rules on expert testimony, as amended, depart from Daubert and progeny, norms that set the standards for the court’s gate-keeping role for the admission of reliable expert testimony. Instead, the Rules rely on Puerto Rico Supreme Court precedent which seems to be inclined to admit expert testimony, even if unreliable or untested, and leaves to the trier of fact to give the weight to that evidence as it deems appropriate. While the point is not free of debate, precedent in Puerto Rico seems to prefer admitting rather than summarily excluding expert testimony.

Not adhering to Daubert and progeny could have significant repercussions in commercial cases especially those that require expert testimony. One effect may well be that the local court would be less inclined to grant a motion in limine to exclude or limit unreliable expert testimony on the issue of damages. Law 75 cases almost always require expert testimony on the computation of damages. Thus, expert testimony may get admitted, and depending on the weight of all the other evidence, it may be more difficult to set aside a Judgment as clearly erroneous when the error has been that the court gave improper or undue due weight to expert testimony or where the determination turns on the credibility of one expert over the other.

So, if you are a distributor or a principal in a Law 75 case, where would you rather be if you had an opportunity to decide what forum to litigate in? It seems that the amendments of the Puerto Rico Rules of Evidence add another factor to the mix.

Hormel, a producer of meat products, faces allegations in federal court of encroachment of exclusive territory from sales of “Hormel Party Platters” to COSTCO, a national account.

2010-01-04T11:42:00.003-05:00

This topic continues to be one of the “hottest” or most current in distribution law practice in Puerto Rico.

For many years, retailers in Puerto Rico have been aggressive to improve their margins by using whatever leverage and buying power they may have to demand that suppliers, including Puerto Rico distributors, lower their wholesale prices of groceries and provisions. With the entry of national accounts and clubs, such as Wal-Mart (Sam’s), Costco, and Walgreens, the retail market of groceries and provisions in Puerto Rico has become more competitive in terms of price, quality and services. The consumers' demand for produce and other commodities is price sensitive (elastic) so that the national accounts or clubs- and the Puerto Rico retailers that compete with them- make purchases either from Puerto Rico distributors that have exclusive agreements or from other sources of supply that claim to offer the same products at the best possible prices but without providing any value-added services.

It is widely known that some of these national accounts or clubs purchase brand-name products that have exclusive distribution contracts with Puerto Rico distributors from suppliers or wholesalers directly in the continental U.S. for resale not only to customers throughout the United States but to Puerto Rico.

Puerto Rico distributors that must compete in this challenging environment may opt, 1) to reduce their margins and lower their prices but continue to provide the same level of service, 2) request suppliers to pay them commissions on these direct sales and have them match the prices offered to the national accounts, and/or 3) sue to enforce their claims of exclusivity. A few Puerto Rico distributors that claim to have exclusive distribution agreements have complained that sales to national accounts or to Puerto Rico retailers constitute impairments by their suppliers in violation of Law 75 or a third-party’s tortious interference with contract.

Reported federal litigation in both Puerto Rico and New Jersey (the Twin County and Di Giorgio cases) have not slowed the tide of a new wave of claims provoked by these national accounts aggressively purchasing products at bulk in the U.S. and reselling to end-user customers at their stores in Puerto Rico. See Twin County Grocers v. Mendez, 81 F. Supp. 2d 276 (D.P.R. 1999); Di Giorgio Corp. v. Mendez & Co. Inc., 230 F.Supp.2d 552 (D.N.J. 2002); see also Sterling Merchandising v. Nestle, 546 F.Supp.2d 1 (D.P.R. 2008)(dismissing tortious interference counterclaim from sales first made outside Puerto Rico);compare Eliane Exportadora v. Maderas Alfa Inc., 2007 WL 2585173 (TCA 2007)(verbal exclusive distribution agreement and course of conduct as the sole distributor of branded ceramic products impaired and constructively terminated without just cause in violation of Law 75 caused by supplier’s sales to Home Depot and other distributors).

There is a common thread of legal issues arising in all these cases, including in one of the most recent cases, Medina & Medina Inc. v. Hormel Foods Corporation, No. 09-1098 (JAG) pending in the U.S. District Court for the District of Puerto Rico. Those issues are: first, does an exclusive distribution agreement in fact exist; second, if so, is the agreement “airtight” in the sense that the contracting parties intended to prevent all intrabrand competition?; third, is the exclusive agreement confirmed or refuted in writing or by the course of performance of the parties; fourth, is Puerto Rico law being applied extra-territorially affecting sales made outside Puerto Rico to raise any concerns under the Dormant Commerce Clause or federal antitrust laws?; fifth, are those impairment claims time-barred under Law 75’s three-year caducity period or the Civil Code’s one-year limitations period for tort claims?; and sixth, does federal intellectual property law preempt Puerto Rico Law 75 in these circumstances? Finally, should some of these issues be certified to the Supreme Court of Puerto Rico?

With a stagnant economy and price competition as aggressive as ever, we can expect more litigation in the near future of this type of claims brought under Law 75 and the Civil Code. Where timely legal advice is sought by the supplier or the distributor, “preventive medicine” may help to minimize the risk of litigation.

Where there is no choice but to litigate, courts should definitively put to rest once and for all the legal issues that can be decided conclusively and do not depend for their resolution on the facts and circumstances of each case.

A first-filed case related to a Law 75 action stays in Texas with personal jurisdiction over the Puerto Rico franchisee

2009-12-22T07:17:00.006-05:00

Case law reported during the past two years, including in Law 75 actions, proves that the party who wins the race to the courthouse normally stays in the chosen forum. The lesson to be learned is that in a contractual dispute under Law 75, unless the parties have agreed to negotiate and stay the filing of actions, the best adage is “sue first and talk later” especially in the absence of a choice of forum clause.

In Metromedia Steakhouses Company v. BMJ Foods Puerto Rico, 2008 WL 794533 (N.D.Tex. Mar. 26, 2008), a franchisor and operator of Ponderosa steakhouses in Puerto Rico sued a franchisee first in state court in Texas, and later transferred to federal court, for wrongful withholding of fees under the franchise agreement. The franchisee responded with a suit in Puerto Rico local court for breach of contract presumably under Law 75, a case later removed to federal court.

In defending a motion to transfer, the franchisee argued that the Texas case was not first-filed because the Texas court had not asserted jurisdiction over the action, an argument which the federal court in Texas rejected. The franchisee failed to offer any evidence to prove that relevant factors, such as the convenience of third-party witnesses, favored transferring the case to Puerto Rico. Despite Puerto Rico courts’ greater familiarity with Law 75, the court found that the balance of all the other factors weighed in favor of keeping the case in Texas.

The court also asserted specific personal jurisdiction over the Puerto Rico franchisee from negotiating the contracts in Texas, exchanging correspondence and maintaining a business relationship over 10 years with the Texas franchisor and from business visits to Texas.

First-filed action in Puerto Rico plays a strategic role to oppose successfully a motion for change of venue of a Law 75 case to Ohio courts

2009-12-21T21:32:00.001-05:00

Plaintiff is a distributor of industrial safety products and operates a chain of retail outlets under the “Safety Zone” brand. Defendants are various Ohio corporations that manufacture, distribute, and operate retail stores under the “Lehigh Outfitters” brand. After various acquisitions, plaintiff became the successor in interest or assignee of an exclusive distribution agreement of Georgia Boot and Dickies products in Puerto Rico.

Defendants’ sales of products within the exclusive territory of Puerto Rico provoked a Puerto Rico distributor to file an action in federal court in Puerto Rico for impairment and termination damages under Law 75 and a claim for abuse of process under the Civil Code. New York Wiping and Industrial Product Company v. Rocky Brands, Inc., 2009 WL 2843336 (D.P.R. Aug. 31, 2009)(JAF).

One day later, defendants aggressively countered plaintiff’s lawsuit with a notice of termination of the agreement and a few days later with an action for trademark infringement and unfair business practices filed in Ohio state court and since removed to Ohio federal court.

In the Puerto Rico action, defendants moved for dismissal or transfer, and the court denied the motion. “Where the parties have filed two actions in separate districts, however, and the actions are nearly identical, the first-filed action is generally preferred in a choice of venue decision." The court noted an exception to the first-filed rule in special circumstances when one party misleads the other not to file suit in anticipation of negotiation, an exception which defendants relied upon. The court, however, found no basis to apply the rule or the exception as the two cases were not identical. Thus, defendants were unable to rebut the strong presumption under federal law favoring plaintiff’s choice of forum in Puerto Rico, noting that “[d]efendants' ownership and operation of retail businesses within Puerto Rico precludes the possibility of inconvenience in litigating here.” On another note, the court dismissed sua sponte and with prejudice plaintiff’s abuse of process claim presumably from the litigation in Ohio as unripe and conjectural.

Liberty of contract is paramount over Law 75 when it is the dealer's fault for not renewing the agreement

2009-12-20T20:07:00.002-05:00

It is well-settled that Law 75 creates, as a matter of public policy, an indefinite dealer-principal relationship unless the principal proves just cause to end it. By the same token, a provision in a dealer’s contract stipulating an expiration date is unenforceable for the principal must also have just cause not to renew the agreement. In those circumstances, Law 75 prevails over the terms of the contract.

Are there instances where liberty of contract can be reconciled with Law 75’s interests to preserve the relationship indefinitely absent just cause? Yes, at least where the dealer is solely responsible for the termination, according to Nike International v Athletic Sales, Inc., 689 F. Supp. 1235 (D.P.R. 1988). There, the principal argued that the distribution agreement ended on its own terms when the dealer failed to comply with a clear and unambiguous provision requiring prior notice of intent to renew it before its expiration. The dealer argued that the provision in the agreement was unenforceable as contrary to public policy in Law 75 which requires just cause for the principal to refuse to renew the agreement when it expires. The court rejected the dealer’s argument, reasoning that the provision was not offensive either to Law 75 or the Civil Code as the termination of the relationship was exclusively the dealer’s fault for failing to follow the clear terms of the agreement to renew it. In an often-quoted phrase, the court held “…the legislature did not intend that Law 75 be a safe-haven for dealers to avoid the express terms of the contracts to which they willingly subscribed, as is the case of the renewal notice requirement found in the instant contract.”

Nike stands for the proposition that Law 75 does not invalidate mutual contractual provisions specifying the manner in which the dealer must notify its intent to continue the relationship. Thus, Law 75 penalizes the principal when it acts unilaterally or subjectively to terminate the relationship without just cause, but Law 75 is not implicated when the termination is the dealer’s fault.

Is a constructive termination actionable under Law 75?

2009-11-20T07:11:00.003-05:00

Law 75 contemplates liability in three circumstances, one, when the principal terminates the relationship for lack of just cause, two, when the principal refuses to renew the relationship (in effect, a termination), and three, when the principal impairs the relationship. The difference between impairment and termination is significant as it influences the measure of damages.

The underpinning of impairment is a breach of contractually-acquired rights. This means that the relationship continues but some essential and material contractual right of the distributor has been prejudiced by the principal’s actions. The notion of termination, however, presupposes on its face a rupture in the relationship. Conceivably, an impairment could be a termination when the essence of the agreement vanishes from the unjustified act by the principal, such as the unilateral conversion of an exclusive agreement into a non-exclusive relationship. At least one appellate decision has held that some types of impairments, for example, a principal’s termination of an exclusivity provision, are constructive terminations. “Constructive” in the sense that an essential component of the agreement has been canceled, but the relationship continues albeit in an impaired or lesser form. In these situations, the distributor has been able to claim the full measure of Law 75 damages from a termination. The impairment component of damages comes in by reducing the compensation by the benefits realized by the distributor from sales of the lines or products that continue despite the termination of the exclusivity.

In a related context, the U.S. Supreme Court in Mac's Shell Service Inc. v. Shell Oil Products Co., a franchise termination case brought under the federal PMPA (originating in the First Circuit) granted certiorari to consider whether the PMPA contemplates a claim for constructive termination and constructive non-renewal. Oral argument will be heard in January, 2010.

Is constructive termination actionable under Law 75, and if so, the scope of what it means, are unanswered questions by the federal courts and the Puerto Rico Supreme Court.

Puerto Rico Law 75 and changes in control or ownership of the distributor without prior notice and consent of the supplier

2009-10-20T08:15:00.000-04:00

It is customary to secure the supplier’s consent when a distributor sells its assets, including its distribution rights, to a successor distributor. It is equally customary for written distribution agreements to require the supplier’s consent for the distributor’s assignment or transfer of the agreement.

Better business practices to avoid litigation suggest giving notice to obtain the supplier’s consent when the distributor sells its assets. After all, the buyer-distributor will normally dish out valuable consideration for the transfer or the assignment of rights and obligations that include or implicate the supplier or manufacturer’s ownership interests or goodwill. And, the manufacturer, as the trademark holder, has legitimate interests to ensure that the new distributor meets all the requirements for the sale or service of its branded products. It is said that a Law 75 relationship is like a partnership. Imagine becoming a partner without the co-partner's consent. Thus, problems arise when a distributor transfers or assigns its rights, whatever those rights may be, and the new distributor assumes the risk of paying valuable consideration for those rights, without the manufacturer’s consent. The case law on the topic of changes in the distributor’s control is scarce. And, Law 75 suggests an answer to only part of the issue.

Section 278(a)-1 of Law 75 provides:
"For the purposes of this chapter and specifically for the effects of § 278a of this title:

(a) The violation or nonperformance by a dealer of any provision included in the dealer's contract to prevent or restrict changes in the capital structure of the dealer's business, or changes in the managerial control of said business, or the manner or form of financing the operation, or to prevent or restrict the free sale, transfer or encumbrance of any corporate action, participation, right or interest that any person could have in said distribution business, shall not be considered as being just cause unless the principal or grantor shows that such nonperformance may affect, or has truly and effectively affected the interests of such principal or grantor in an adverse or substantial manner in the development of the market, distribution of the merchandise or rendering of services."

While no Puerto Rico state or federal court has interpreted or otherwise applied Section 278a1(a) of Law 75, the manufacturer could argue and attempt to prove that the transfer or assignment of a distribution agreement to a third party (who is not an affiliate of or controlled by the existing distributor) without its consent affects its interests adversely and substantially allowing it to terminate the agreement.

What happens between the manufacturer and the new distributor or the successor after the sale has been consummated? Most certainly, the manufacturer should not be bound to continue the relationship automatically, without more, as case law holds that Law 75 is not a straightjacket for a distributor to impose its will over the manufacturer.

Based on cases dealing with analogous issues, a principal has an interest to pursue good faith negotiations with the new distributor based on reasonable expectations regarding essential elements of the dealership, and terminate the relationship for “just cause” if the parties reach a bona fide impasse. R.W. Intern. Corp. v. Welch Foods, Inc., 88 F.3d 49, 53 (1st Cir. 1996), is instructive. There, the First Circuit affirmed summary judgment in favor of the principal after the latter proved that the parties had reached a bona fide impasse on an essential modification to the terms of their ongoing contract (i.e., whether the successor distributor would continue to handle competing product lines) and terminated the successor distributor. The court reached this conclusion after quoting its earlier decision in the same case, in which it stated:

“[A] supplier has just cause to terminate if it has bargained in good faith but has not been able to reach an agreement as to price, credit, or some other essential element of the dealership. This would be true at least where, as here, the supplier's market in Puerto Rico was well established before the current dealer relationship and the supplier's action therefore is not aimed at reaping the good will or clientele established by the dealer.” R.W. Intern. Corp., 88 F.3d 49, 53 (internal quotation marks omitted), citing, R.W. Int'l Corp. v. Welch Foods, Inc., 13 F.3d 478, 484 & n. 4 (1st Cir. 1994).

Lessons learned:

Distributors beware! Seek the manufacturer’s consent to ratify existing agreements or enter into new distribution agreements before paying any money for transfers or assignments of distribution rights. Principals beware! In some circumstances, doing business with a new distributor without a formal written agreement may implicate Law 75 issues, provoking contract negotiations and litigation. It goes without saying that timely and competent legal advice will avoid many potential problems.

Minimize the exposure to potential liability from Puerto Rico's relationship Laws 75 and 21

2009-09-23T09:35:00.001-04:00

IN 2001, I WROTE “A NUTSHELL ON WAYS TO MINIMIZE THE EXPOSURE OF LIABILITY FROM PUERTO RICO’S DEALER PROTECTION STATUTES” PUBLISHED IN CARIBBEAN BUSINESS. SOME SUGGESTIONS MAY BE RELEVANT TODAY WHEN ADDRESSING LAW 75 ISSUES DURING CONTRACT NEGOTIATIONS OR LITIGATION. EXCERPTS FOLLOW.

General Observations

At least eighteen states and Puerto Rico have laws which protect dealers, distributors, and franchisees. In Puerto Rico, a supplier, franchisor or manufacturer (the “principal”), may not terminate, impair, or refuse to renew an agreement with a dealer, franchisee, or sales representative for the distribution of goods and services in Puerto Rico without “just cause”. The remedies include preliminary injunctive relief and damages (lost profits, goodwill, the value of capital investments and inventory etc.). These special laws, known as Law 75 (covering dealers), and Law 21 (protecting sales representatives) are remedial and have public policy implications. Regardless of how the parties characterize their business relationship, there is no enforceable way for a principal to escape coverage from those special laws by contractually opting-out in advance. Even a state choice of law clause in a written agreement will not be effective to make Law 75 (or 21) inoperative. See Caribbean Wholesalers v. JVC, Business Franchise Guide CCH at 10,470 (S.D.N.Y. 1994) (holding that a New York choice of law clause is null and void in a distribution contract governed by Law 75).

Practice Pointers

An option to avoid Law 75 or 21 altogether would be to establish an employment relationship. Generally, an employee lacks Law 75 (or Law 21) protection. Lugo v. Matthew Bender, 579 F. Supp. 638 (D.P.R. 1984). Another special law in Puerto Rico, No. 80, limits damages for a wrongful termination of employment to approximately one-month’s salary. To be sure, there are important corporate, labor, and tax law considerations which govern employment relationships (and increase the risks and costs of doing business in Puerto Rico), which do not apply to independent contractors. Laws 21 and 75 presume the existence of an independent contractor or partnership relationship.

Essential legal protections for suppliers or manufacturers when doing business with sales representatives or distributors in Puerto Rico, include, 1) a comprehensive written agreement with a definite term, 2) a non-exclusive relationship, 3) arbitration and reasonable choice of forum clauses, 4) appointment of a distributor or sales representative with “limited functions”, and 5) completeness and integration clauses.

The only time it would make sense for a principal not to have a new written sales representative agreement would be if commercial dealings arose before the effective date of Law 21 (the sales representative protection statute), that is, before December 5, 1990, and no Law 75 dealer relationship existed. Law 21 does not apply retroactively before its effective date. Nieves v. Dymax, 952 F.Supp. 57 (D.P.R. 1996)(holding that Law 21 did not apply retroactively to relationship that began in 1986 despite written agreement of 1995 that did not extinguish prior obligations). The same considerations apply to Law 75 which was enacted in 1964.

A strategy when drafting a written agreement may be to limit certain functions of the sales representative or dealer (as much as business considerations permit) and minimize potential liability if these laws do apply [And, define a methodology or formula to compute actual compensatory damages in the event of a termination or establish a set off procedure to deduct the principal’s value associated with its ownership rights in the line from the net profit, if any, earned by the distributor]. For example, a service mark licensor (Thrifty Rent-A-Car) was able to escape coverage from the distribution laws in Puerto Rico where the licensee did not have an obligation to distribute or resell products to customers and relied on the national advertising, goodwill, and reputation of the franchisor. See Velasco Rental v. Thrifty, 1990 CCH par. 21,073 at 9589 at (D.P.R. 1990). A principal may structure the promotion obligation of the licensee or dealer to require the payment of a fee to tap into the licensor’s mark, reputation, and goodwill. Another possibility is the elimination of quotas or sales goals (which normally are a quid pro quo of exclusivity). The licensee or dealer, however, should still use its best efforts to maximize sales of the products. The relationship should be on a purchase and sale basis (no commissions or compensation based on achievement of sales goals or quotas). A licensee or dealer should be prohibited from warehousing or distributing goods beyond the need to keep an adequate inventory for resale to customers in the stores (i.e., no resale to wholesalers or retailers).

A non-exclusive agreement is arguably outside the coverage of Law 21 (but protected by Law 75). The scope of the non-exclusivity should be clearly defined to mean that the supplier retains the right to sell directly in the territory, appoint other distributors, or sell through e-commerce.

Although a principal cannot refuse to renew a dealer’s contract (or sales representative agreement) after it expires without just cause, a reasonable contractual provision for pre-expiration notice of a renewal term is enforceable in the Law 75 context and binds the dealer. Nike v. Athletic Sales, Inc., 689 F. Supp. 1235 (D.P.R. 1988).

Quotas or sales goals must be reasonable. Language such as the one below may work as an admission that serves to avoid potential disputes over the reasonableness of quotas: “Given actual data and forecasts of market conditions in Puerto Rico, Sales Representative or Dealer recognizes that the minimum sales requirements in this Agreement are reasonable and adjust to the reality of the Puerto Rico market at this time.”

If litigation is imminent, the supplier should carefully consider the adage that “the best defense is a good offense.” Since the Constitution of Puerto Rico affords no right to trial by jury in civil cases, the supplier normally wants to avoid litigation with a disgruntled dealer or representative in the U.S. District Court of Puerto Rico which does guarantee it. The supplier may consider filing a claim in local court for collection of monies (if any are past due and owing) or declaratory judgment action against the resident dealer or representative. Because federal law prohibits a removal of the action to federal court if any of the defendants is a resident of the forum state, the dealer or representative will be unable to litigate a Law 75 or 21 claim with a jury in federal court even though the action could have been filed originally there.

[Note: Since 2001, there have been judicial decisions that may affect the observations described above. The author disclaims expressing any legal opinion on any issues without prior consultation and the establishment of an attorney-client relationship].

Legislature of Puerto Rico tackles a perceived problem of parallel imports potentially implicating the Law 75 interests of exclusive distributors

2009-09-14T10:42:00.001-04:00

Judicial decisions have not conclusively put an end to litigation on whether (or when) an exclusive distributor would state a Law 75 claim for impairment (or for tortious interference) when its principal sells a product covered by the exclusive agreement to a third party (usually a stateside wholesaler or broker) who then sells the product for resale, consumption, or use by customers within Puerto Rico.

In P. of C. 1945 of August 27, 2009, the House of Representatives of Puerto Rico (Jimenez-Negron), drafted legislation to remedy what is perceived as a loophole in Law 75 caused when “foreign companies that are established in Puerto Rico bring products whose exclusivity is protected by distribution contracts registered (sic, protected) by Law 75” and these companies “profit from the efforts of persons that have exclusive rights…”.

The proposed legislation would amend the just cause protection in Article 2-A (b)(5) of Law 75 by establishing an additional presumption of lack of just cause “when the principal permits another client to establish in Puerto Rico the sale of a product that is protected by an exclusive agreement (translation ours).” The project was referred to the Commission for Economic Development, Planning, Commerce, Industry and Telecommunications.

Unclean hands and illegal activity won’t get you a preliminary injunction under Law 75

2009-09-07T09:49:00.005-04:00

In Prime Wholesalers v. Fields Motorcars of Florida, 08-1640 (ADC), 2009 WL 2612519 (D.P.R. Aug. 17, 2009), Prime Wholesalers, a car retailer in Puerto Rico, sued Fields Motorcars, a Florida wholesaler, in federal court for alleged violation of Law 75. Prime moved for a preliminary injunction when Fields refused to continue selling it new BMW vehicles, which represented 90% of Prime's sales. During years of dealings, a car salesman of Fields sold new BMW cars to Prime in a scheme to deceive the manufacturer BMW that prohibited wholesalers from selling new cars to brokers or dealers except to end users. BMW NA had appointed a retailer Autogermana as the exclusive distributor in Puerto Rico (exclusive in the sense that only sold BMW vehicles). BMW NA later sought to stop the practice of unauthorized sales into the territory. Prime and Fields devised a scheme that induced BMW NA for years into believing that Fields sold the vehicles directly to customers, practices that the court found “outrageous.” Unauthorized sales by Fields to brokers or dealers would expose Fields to breach of contract in its agreement with BMW NA and a potential termination.

The court assumed, for argument, that Prime qualified as a Law 75 dealer. While Prime satisfied some of the threshold requirements to qualify for Law 75 protection, “Prime could have stopped purchasing vehicles from Fields anytime, with no negative consequences” and the court found this “extremely problematic” to qualify as a dealer.

The case turned on the court’s findings, after an evidentiary hearing, that Prime did not establish likelihood of success on the merits and irreparable harm. Fields argued that Prime could not prevail on a Law 75 claim because the underlying distribution agreement with Fields was contrary to law. The court held that an injunction would harm BMW NA’s contractual rights and would expose Fields to breach of contract so Prime could not prove likelihood of success of establishing lack of just cause. The court rejected in a footnote the argument that BMW NA's non-price restrictions violated the antitrust laws.

The court also held that Prime’s argument that 90% of its sales were derived from Fields was an economic injury which by itself was insufficient for a showing of irreparable harm. Reputation damages can also be redressed by a monetary award.

When it came to balancing the equities, the court was not too considerate either for Prime or Fields. The court found that the public interest would not favor an injunction for it “would promote and condone” both Prime’s “illicit activity” and Fields’ ”willful blindness.” A showing of Prime’s unclean hands was sufficient by itself to deny equitable injunctive relief as it did.

Editor’s note: Although a court’s findings at the preliminary injunction stage are not binding on the merits, the court’s opinion in Prime Wholesaler about a party’s inability to assert a Law 75 claim when it has participated in illicit activity has undertones that may, and should, influence the adjudication of merit issues under Law 75.

For instance, one issue that comes up frequently in Law 75 litigation is a dealer’s standing to claim actual damages for impairment or termination when it has underreported its income or overstated its expenses in the relevant tax returns or audited financial statements. Dealers have alleged that their actual damages under Law 75 are greater than the net income reported in their returns or audited statements. To be sure, there are legitimate instances where the dealer reports total company losses in its operations but is able to prove that the line was profitable. In that scenario it would not be necessarily inconsistent to claim actual damages when the company as a whole reported a loss. Courts have not been uniform when dealing with disparities between actual and “official” damages. Some courts admit the evidence under the premise that it is a credibility issue for the jury or trier of fact. This line of thinking holds that reporting a loss in the official business records does not prove that the dealer suffered no actual damages from a termination or impairment of a product line. While that may be so, it is difficult to ignore that a party may abuse the legal system as a tool to benefit from what is potentially fraudulent conduct. Other courts admit the evidence but report the dealer’s purported tax evasion to the authorities. But few, or none, disallow the claim under the notion that a party cannot recover from potentially illicit activity or should be estopped from asserting a claim under Law 75. Is it for the Legislature to add an unclean hands defense in Law 75 or for the courts to deal with this issue? The question is open for debate.

Would Law 75 apply to protect stateside or foreign distributors that resell merchandise or provide services to customers in Puerto Rico?

2009-08-27T18:09:00.002-04:00

The answer is “probably not” from the mere act of selling, distributing or servicing products to customers in Puerto Rico.

Puerto Rico Law 75, Sec. 278(a), defines a dealer as the person in charge “in Puerto Rico” of the distribution of a given merchandise or service. In A. M. Capen’s v. American Trading, 202 F. 3d 469 (1st Cir. 2000), the First Circuit, after applying Puerto Rico law, held that the “in Puerto Rico” requirement of Law 75 meant that the dealer must be located in, be a resident of or be authorized to do business in Puerto Rico. There, a New Jersey corporation with its principal place of business in New Jersey claimed Law 75 protection from the termination of an exclusivity contract. The distributor alleged that taking orders from Puerto Rican customers, selling into the territory and having a sales agent make occasional visits to Puerto Rico qualified the distributor for Law 75 protection. However, the New Jersey distributor did not advertise in Puerto Rico, nor did it maintain a warehouse, showroom, assets, inventory, employees, office, address or telephone number in Puerto Rico. On these facts, the appellate court held that the New Jersey distributor did not operate in Puerto Rico to qualify for protection under Law 75 and reversed the finding of liability under Law 75.

A stateside or foreign distributor would not qualify for Law 75 protection merely because it has a contract with the principal that requires the sale and distribution of products in Puerto Rico. Occasional visits by a sales agent, standing alone, would not tilt the balance to qualify as a dealer. By the same token, the status of the distributor as a foreign or stateside corporation would not automatically exclude the application of Law 75, though the statute clearly applies only to entities “in Puerto Rico”. Depending on the circumstances, it appears from Capen's that a stateside or foreign corporation could qualify for protection if it becomes registered to do business in Puerto Rico or performs substantial operations in Puerto Rico with respect to the distribution relationship.

Parties could potentially minimize (but not altogether exclude Law 75 exposure) by: 1) entering into a Capen’s style distribution relationship with a stateside or foreign corporation that does not operate within and is not registered to do business in Puerto Rico, and 2) enter into a “limited functions” purchase and sale type of agreement.

Federal court denies dealer’s motion for a preliminary injunction under Law 75 after finding an adequate remedy at law and no irreparable harm

2009-07-29T10:05:00.005-04:00

As of late, dealers have not fared well in federal court when requesting preliminary injunctions under Law 75. It is unusual, however, for a court to deny preliminary injunctive relief after concluding that the dealer showed a likelihood of success on the merits of its claims and the public interest favors the injunction. Beatty Caribbean v. Nova Chemicals, No. 08-2259, 2009 WL 2151303 (ADC-CVR)(Velez-Rive, U.S. Mag. Judge) (D.P.R. July 16, 2009) is such a case.

There, the agent complained that the principal impaired verbal agreements for the sale and distribution of chemical products by unilaterally reducing the commission percentage from 5% to 3% in violation of Laws 75 or 21. The principal counterclaimed that an asset purchase transaction did not change a previously existing sales representation agreement, and that the agent was a non-exclusive representative who lacked an actionable claim under Laws 75 and 21. After consenting to proceed with the Magistrate and holding a hearing, the court denied the request for a preliminary injunction.

While the court found that, prima facie, the principal had impaired a protected relationship by reducing the payment of commissions without just cause, the agent had failed to satisfy two of the traditional prerequisites for injunctive relief, namely, balancing of the equities and irreparable harm. The court cited, and applied, the traditional prerequisites for injunctive relief under Federal Rule 65, noting that the standards are “tempered” considering the public policy objectives behind Law 75. The court determined that it would not overlook the issue of irreparable harm, though cited case law suggesting that a plaintiff need not show irreparable harm under Law 75.

On the issue of irreparable harm, the agent testified that the reduction in commissions caused a 40% reduction in revenues, which the court determined was legally insufficient for finding irreparable harm. The court held that financial injury alone does not constitute irreparable harm and that damages are recoverable at law. The balance of the equities favored the principal, the court said, because an injunction would alter existing relationships with other dealers.

My editorial comment. While the principal has a good reason to rejoice for the outcome in that case, the order denying the preliminary injunction may be vulnerable to attack by interlocutory appeal. The abuse of discretion standard will not help affirm the opinion because the district court found that prima facie the agent was a dealer or sales representative and there was no just cause. So, two of the most important requirements were met. The court’s conclusion that irreparable harm is mandatory for a federal court to issue a preliminary injunction under FRCP 65 is correct and sound. Although not discussed, under Hanna v. Plummer, the federal procedural rules requiring a showing of irreparable harm preempt contrary state substantive law, but Law 75 does not prohibit considering the traditional factors for preliminary injunctive relief so the court did the right thing to evaluate that factor. Where I think there might be an issue is with the court’s finding that financial hardship and a 40% drop in revenues are insufficient for a showing of irreparable harm. So, at the end of the day, the standard on appeal to review the legal issue of irreparable harm may be plenary and who knows what can happen.

Is the federal court a more favorable forum for principals in Law 75 or Law 21 cases? Federal court enforces choice of law and forum selection clauses

2009-07-14T08:09:00.007-04:00

Despite the possible disadvantages to defendants of trial by jury in federal civil cases (there is no right to trial by jury for ordinary civil cases in local Puerto Rico courts), many defendants opt to file first in federal court or remove to federal court cases filed against them in the local courts. A perception may exist that federal courts are more receptive or uniform in the resolution of cases by summary judgment than the local courts. With Daubert's requirements for the admission of expert testimony, one could argue that federal courts are more rigorous in their gatekeeping function to limit or exclude expert testimony in commercial cases than the local courts in bench trials generally are. The U.S. District Court of Puerto Rico and the First Circuit have also developed over decades a body of jurisprudence settling many Law 75 and Law 21 issues raised in diversity cases. For these reasons, a defendant may have reason to think that the federal court is a more favorable forum even considering the risk of trial by jury.

One example is Rodriguez Barril v. Conbraco Industries, 2009 WL 1940424 (D.P.R. June 30, 2009)(Garcia-Gregory, J.), where a sales representative filed a termination action against the principal under Law 21 in the local court. After defendant removed the case on grounds of diversity jurisdiction, plaintiff attacked with a motion for a preliminary injunction. Defendant responded with a motion to dismiss to enforce a forum selection clause selecting the law and courts of North Carolina. The court referred the motions to a U.S. Magistrate Judge (Velez-Rive) who recommended a dismissal of the action. After de novo review, the court agreed with the Magistrate and dismissed the action without prejudice. The court concluded that federal law favored the enforcement of forum selection clauses, the clause in the agreement was mandatory not permissive, and Law 21 did not proscribe the enforcement of forum selection clauses. As to the choice of law clause of North Carolina, to the exclusion of Puerto Rico law, the court concluded that “Plaintiff knew that these provisions would be enforced in the event of an alleged breach.” Note that the court did not have before it a Law 75 claim and the outcome may not necessarily be the same in that situation.

Lesson learned: choose carefully where to file or defend a Law 75 or Law 21 case depending on the legal issues at stake as the forum may determine the outcome.

“Hot topics” in Law 75 litigation

2009-07-08T08:57:00.006-04:00

A few issues come up frequently during contractual negotiations or litigation and some are cutting-edge or even novel. These are my "top ten", but not in order:

1) Do retailers qualify for protection as Law 75 dealers, and for the retailers that might, what types of activities or services do they perform that make them qualify?
2) Is verbal evidence of an alleged exclusive distributorship admissible or barred by Puerto Rico substantive law or does the issue of admissibility depend on whether there is a clearly non-exclusive and integrated written agreement in effect?
3) What is the meaning and scope of exclusivity in Law 21(i.e., the Sales Representative Act)?
4) When is product diversion (sales outside the territory) just cause?
5) Is a principal responsible for market interference caused by third parties that sell product into an exclusive territory?
6) Does Puerto Rico Law 75 or the doctrine of tortious interference apply when title of the product passes outside Puerto Rico but the resale of the infringing product takes place within Puerto Rico?
7) In what circumstances would a sale of assets by the principal, including the distribution rights, constitute a justified market withdrawal?
8) Of course, there are many issues involving the methodology of damages, such as, when is recovery of goodwill appropriate, what should be the correct method to compute goodwill, and what should be the measure for recovery of lost profits?
9) Do the requirements for preliminary injunctive relief in the Federal Rules preempt Law 75 if read to allow a preliminary injunction without a showing of irreparable harm etc.?
10) Would the Federal Arbitration Act preempt Law 75 if an arbitration clause in a written distribution agreement includes a choice of law clause applying laws other than Puerto Rico?

There’s case law pre-2009, sometimes conflicting, on some of these issues, but stay tuned for future developments.

Distribution and Agency Agreements in Latin America: a comparative law analysis

2009-07-05T18:52:00.001-04:00

Comparative law can be persuasive authority when necessary to interpret Puerto Rico’s dealer relationship statutes. In fact, Puerto Rico Law 75 was influenced by laws then existing in the Dominican Republic and certain common law jurisdictions. For a comparative law analysis of relationship statutes in certain Latin American countries, namely, Chile, Colombia, Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Nicaragua and Panama, see Hernan Pacheco, “A Comparative Study of Distribution and Agency…in Selected Latin American Jurisdictions”, ALI-ABA, March 18-20, 2009 (available in Westlaw) . Some of these countries have special laws similar to Law 75. In others, civil and commercial laws govern agency and distributor relationships without special legislation. There are many differences and similarities with Puerto Rico’s relationship statutes. Some jurisdictions require and define just cause for termination and have formulas for indemnification. In some of these countries, a distributor’s unauthorized disclosure of confidential information is statutory just cause. In Honduras, an unjustified termination allows recovery of five times the annual gross profit. In Colombia, the dealer’s compensation depends on the “efforts” of the agent to support the brand or service, and, for example, the dealer may receive 1/12th of the average of the commission, royalty, or profit obtained during the last three years for each year that the contract was in effect.

Swinging for the fences but striking out: requesting a preliminary injunction under Law 75 and not getting it may taint the outcome on the merits

2009-06-23T08:42:00.004-04:00

I’ve written before that the traditional requirements for preliminary injunctive relief under FRCP 65 are mandatory and preempt Law 75 if read to allow the granting of a preliminary injunction without a showing of irreparable harm. It’s not an Erie issue, but a Hanna v. Plummer issue, which holds that the federal civil rules preempt state substantive law when in conflict.

It does not matter, ruled a U.S. Magistrate Judge in Penn Shoppe v. Montblanc North America, No. 08-1939(JAG/BJM)(April 1, 2009), for the supplier in that case met its burden of showing just cause for termination. In that case the line represented over 40% of the retailer’s business. After an evidentiary hearing, the Magistrate found that the retailer’s consistently late payments, purchases over the credit limit and bounced or postdated checks- practices that were not condoned by the supplier in the regular course of dealings-did not alter the established payment terms. In sum, the Magistrate concluded that the movant had not established a likelihood of success on the merits for a preliminary injunction under Law 75.

On July 31st, the court adopted the Magistrate's Report and Recommendation in its entirety.

About my comment that a denial of a preliminary injunction may taint the final outcome, my point is that parties should evaluate carefully the likelihood of success on the merits of their claims before moving for interim relief (attachments or injunctions). While it is true that a court's findings at the preliminary injunction stage are not binding on the merits, a court's conclusion on whether the requirement of likelihood of success has been met, unless reversed on appeal, may influence that court's disposition of the case especially in the context of a motion for summary judgment or after a bench trial.

Manufacturer’s offensive to enjoin an alleged exclusive distributor from using its trademark falls short on appeal when faced with a Law 75 claim

2009-06-22T09:28:00.002-04:00

This case illustrates the risks of doing business in Puerto Rico without a formal written agreement defining the essential elements and scope of a distributorship. In Universal Manufacturing v. Ricardo Cruz Distributors, 2009 WL 728309 (TCA 27 Feb. 2009), a retailer of cleaning products sold under the brand name “Doctor Mecanico” sued the manufacturer and owner of the trademark in the local court for breach of an alleged verbal exclusive agreement under Law 75. The reseller alleged that the manufacturer impaired the relationship by selling the products to certain exclusive customers. While the manufacturer disputed the existence of exclusivity, it had authorized the retailer to sell the products to customers. Responding to the reseller’s motion for a preliminary injunction under Law 75, the manufacturer countered with an action for trademark infringement under Puerto Rico law. And, a local court of first instance (Bayamon Part) sided with the manufacturer and issued an injunction prohibiting the reseller from using the mark. The court of appeals reversed and remanded, holding that the lower court had failed to take into account the retailer’s prior commercial use of the mark and the competing interests and claims of the reseller for protection under Law 75.

Lower court legislates to create a blanket exclusion for sub-distributors from Law 75 protection

2009-06-16T15:12:00.003-04:00

In a ruling that should come as a surprise to some, a lower court in Puerto Rico, in Autos Servicios Nissan Kia Inc. v. Motorambar, Inc. No. KAC2008-1390 (906)(San Juan Part, March 4, 2009)(Olivette Sagebien Raffo, J.), held that plaintiff, a sub-distributor of Nissan and Kia automobiles, did not qualify for protection as a Law 75 dealer because it had no distribution agreements with the manufacturers. In a ruling that could have far-reaching implications beyond the facts of the case, the court also held that defendant, the exclusive general distributor in Puerto Rico, who appointed the sub-distributor, was not a “principal” for purposes of being able to confer distribution rights under Law 75. The court found that Law 75’s definition of a “principal or grantor” as the person who enters into a dealer’s contract with a distributor “clearly did not apply” to a general distributor who grants distribution rights to a sub-distributor. The court then relied on Law 75’s legislative history to conclude that the intent was to provide a remedy against abusive practices of manufacturers who cancel unilaterally the distribution rights of distributors. According to this analysis, the principal can only be the manufacturer of a product or service. The case is still pending but the decision has not been appealed.

The lower court’s holding is difficult to reconcile with the plain language of Law 75, its remedial purpose, and with precedent not discussed by the lower court. In J. Soler Motors v. Kaiser Jeep Int’l, 108 D.P.R. 134 (D.P.R. 1978), the Supreme Court of Puerto Rico court rejected an argument that Law 75 does not protect a non-exclusive retailer of automobiles in a geographic region within the territory. The court recognized that “in the transfer of a product from the manufacturer to the consumer a number of intermediaries are involved in forming the chain of distribution.” (Translation ours). Construing the statutory definitions of a Law 75 dealer broadly and finding no provision excluding non-exclusive retailers, the court held that “Law 75 has the purpose of protecting the Puerto Rican intermediaries that represent a product or service in the different levels of the chain of distribution.” (Translation ours).

The lower court’s Motorambar’s blanket exclusion that Law 75 protects only the vertical relationships between a manufacturer and a distributor is questionable for it ignores that many other intermediaries participate in the chain of distribution, including sub-distributors, who may qualify for protection under Law 75.

Acquisitions and consolidations continue in the food distribution industry in Puerto Rico and are relevant to Law 75

2009-06-16T07:56:00.009-04:00

Acquisitions and consolidations of businesses are relevant to lawyers and experts litigating Law 75 cases in Puerto Rico. When a successor distributor acquires a product line or the business from the prior distributor, the purchase price becomes relevant when the manufacturer or principal terminates or refuses to renew the agreement with the successor distributor. It is relevant because Law 75 allows recovery for loss of goodwill and one of the factors in the methodology to compute loss of goodwill is the market value of the line (and the sales price in an arms-length transaction is one of many relevant factors). Thus, distribution lawyers and experts alike, monitor developments in acquisitions as sales prices could be relevant to future litigation.

Not surprisingly, sales prices are rarely reported publicly. For example, El Nuevo Dia reported today that Encinal Inc., d/b/a Star Meat, a distributor of refrigerated and frozen food products, acquired for "an undetermined sum of money" the commodities and food service businesses of Packers Provision, a distributor in Puerto Rico. The businesses include the sale and distribution of meats, poultry, and seafood. As part of the transaction, V. Suarez, one of the largest food distributors in Puerto Rico, will "administer" sales of the branded lines to "traditional channels." (A separate issue is whether a sub-distributor of branded products that is not appointed by the manufacturer is protected by Law 75).

The three-year statute of limitations bars assertion of untimely Law 75 claim.

2009-06-12T18:03:00.001-04:00

In Institute of Innovative Medicine v. Laboratorio Unidos de Bioquimica, 2009 WL 1312870 (D.P.R. March 24, 2009), the court granted summary judgment dismissing a Law 75 claim on grounds that it was time-barred by Law 75’s three-year statute of limitations governing impairment claims. The claim was filed more than three years after the alleged detrimental acts. The court’s holding follows settled doctrine in Controlex Corp. v. Klockner, 202 F. 3d 450 (1st Cir. 2000).

Puerto Rico’s restrictions against arbitration contained in Law 75 come up short of being declared preempted under the Federal Arbitration Act.

2009-06-12T18:02:00.003-04:00

In National Flour Mills and Supply v. Orlando Santiago, 2009 WL 790011 (D.P.R. Mar. 16, 2009), plaintiff filed a declaratory judgment action seeking a declaration that arbitration provisions in the agreement are enforceable and that Puerto Rico’s statutory restrictions in Law 75 against arbitration are preempted by federal law. Law 75 codifies that a court in Puerto Rico has jurisdiction to determine the validity of an arbitration provision in a distribution contract and that such a clause is presumptively treated as one of adhesion. The court held that the dispute was not ripe because defendant had not refused to arbitrate. It also held that the declaratory judgment action was “advisory” for lack of a case or controversy as no local law prohibited or hindered the ability to arbitrate claims in the circumstances of the case. The case was then dismissed for lack of subject matter jurisdiction.

Removal and remand of Law 75 cases: is there “fraudulent joinder”?

2009-06-12T18:00:00.001-04:00

The dilemma as to which court, federal or local, is the most appropriate venue for Law 75 or Law 21 cases continues in 2009.

In Interamerican Builders Agencies Co. v. Sta-Rite Industries, Inc., 602 F. Supp. 306 (D.P.R. Feb. 19, 2009), plaintiff, an exclusive distributor of industrial equipment, sued both the principal under Law 75 and the appointed distributors for tortious interference. After removal to federal court, the court allowed plaintiff’s motion to remand reasoning that, although the diversity defeating distributors were dispensable parties, plaintiff would be prejudiced by litigating in two different forums and the federal court has no significant interest in deciding issues of Law 75.Thus, the court remanded the case to local court to promote the efficient use of judicial resources.

Going the other way is Renaissance Marketing, Inc. v. Monitronics International, Inc., 606 F. Supp. 2d 201 (D.P.R. March 31, 2009). There, the court held that diversity-defeating Puerto Rico distributors were fraudulently joined as defendants to defeat removal jurisdiction. Plaintiff, an alleged exclusive distributor of alarm equipment services, joined the newly-appointed distributors as parties in the federal case despite the fact that a prior lawsuit for tortious interference against them had been filed in the local court. However, the federal complaint for declaratory judgment and breach of contract under Law 21 or Law 75 was directed solely against the principal. “Courts cannot allow a party to litigate simultaneously against the same defendants, in different suits, arising from the same facts.” The court then granted defendant’s motion to dismiss holding that a Texas forum selection clause was enforceable despite the strong public policy in Puerto Rico behind Laws 75 and 21.

Arbitration Panel awards $4.655 million in damages to terminated distributor

2009-06-12T00:27:00.002-04:00

In one of the largest awards in Law 75 cases in Puerto Rico, a three-member arbitration panel, after holding evidentiary hearings in the matter of Mendez & Co. Inc. v Plumrose USA et. al., awarded our client, one of the leading groceries distributors in Puerto Rico, over $4.655 million in damages for lost profits, goodwill, pre and post-judgment interest, and expert witness and attorney's fees for an unjustified termination and impairment of an exclusive distributorship. The Panel had previously entered a Partial Award on liability against respondents finding that the manufacturer's purported reason for the termination, namely, that the agreeement had a fixed term and would not be renewed, was illegal as a matter of public policy under Law 75. The distributor's expert on damages was Reynaldo Quinones, CPA. The manufacturer's expert was Reynaldo Landa, CPA.

The dispute underscores the importance of seeking legal advice from local counsel when problems arise during the relationship, and timely documenting the alleged business reasons that may serve to support a defense of just cause for a termination.

The award was under review in the U.S. District Court for the District of Puerto Rico in Mendez v. Plumrose, Civ. No. 08-2166(ADC), on cross-motions to confirm and vacate the award. The court also had before it a motion for garnishment of assets pre-confirmation of the award. The motions were unresolved as the case settled on confidential terms.

Federal Court Excludes Plaintiff's Expert's Opinion on Law 75 Damages

2009-06-11T17:56:00.000-04:00

In Carana Inc. v. Jovani Fashions, 2009 WL 1299569 (D.P.R. May 7, 2009), the federal court (Fuste, J.) granted mid-trial a manufacturer's motion in limine excluding, in part, plaintiff's expert's opinion on lost profits, lost inventory, and loss of goodwill in a case brought under Puerto Rico's Law 75, a statute protecting a dealer from an unjustified impairment, refusal to renew or termination of a dealer's contract. On the eve of trial, the manufacturer moved, under Daubert, to exclude the expert's opinion as unreliable or unhelpful to the jury. With scant judicial authority particularly on the issue of loss of goodwill beyond the plain meaning of the statute, the manufacturer argued, and the court agreed, that the expert's methodology on goodwill was unreliable because Jorge Rodriguez CPA did not consider the fact that the manufacturer created the goodwill of its brand and image worldwide from significant investments in advertising and promotion. On the issue of lost profits, the court also excluded an analysis of "normalization of earnings" first produced at trial during voir dire because it was not disclosed as part of the expert's report. It should be acknowledged that the author represented the manufacturer in that case.