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

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

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

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

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

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

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

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

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.

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.

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”?

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

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

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.