Tuesday, April 2, 2024

The First Circuit adopted the so-called voluntary-involuntary rule challenged in a Law 75 removed case

In Caribe Chem Distributors, Corp. v. Southern Agricultural Insecticides, Inc., ---F. 4th ---, 2024 WL 1089653 (1st Cir. Mar. 13, 2024), the First Circuit adopted the voluntary-involuntary rule to remand an alleged Law 75 case back to Puerto Rico’s local court. The defendant removed the case to federal court for complete diversity after the state court partially granted a motion to dismiss all the diversity defeating co-defendants. The voluntary-involuntary rule is a judicially created doctrine that forbids removal to federal court of diversity cases when the order or judgment creating removal jurisdiction is involuntary in the sense that plaintiff did not consent to it (such as an order granting a dispositive motion) but permits removal when the order or judgment is voluntary, such as a plaintiff’s voluntary dismissal of diversity defeating defendants. The reason behind it is that the plaintiff may appeal from an order granting a dispositive motion dismissing a party and if the case is removed and the state appellate court later reverses there is a “yo-yo” effect where diversity jurisdiction would be destroyed after removal. In other words, the case should not have been removed because the order creating diversity was found to be erroneous. But that yo-yo effect never happens if the dismissal is voluntary because plaintiff cannot appeal or the order is unreviewable, and no state appellate court can reverse to destroy federal jurisdiction. This rule has a long history in federal common law established from court decisions since the 1900’s. In 1949, Congress amended the removal statute, 28 USC 1446(b), clarifying that a defendant may remove a case that was not originally removable within 30 days from notice of the initial pleading, but becomes removable at a late stage of the proceedings. In any event, the statute says that the case cannot be removed after more than a year from the commencement of the state court action unless the plaintiff acted in bad faith. The statute provides that the defendant may remove the case within 30 days from an order from which it may first be ascertained that the case becomes removable. The defendant argued that the statute’s plain text did not define or distinguish the type of order for removal or account for a plaintiff’s consent or lack thereof. In Caribe Chem, the First Circuit conceded that the statute on its face may be read “broadly” to permit removal at a late stage of the case from an order first creating removal jurisdiction, such as the order granting the motion to dismiss. But, without finding any ambiguity in the text of the law, the court delved into passages of legislative history in a House Report that Congress was clarifying existing law when it amended the removal statute in 1949. From this proof, the court held it was bound to presume that Congress would not have repealed decades of the common law’s voluntary-involuntary rule unless there was a clear directive to the contrary, and it found none. Finding support in all the other sister circuits that had decided the issue, it held that the case was not removable. In the context of a post-judgment Rule 60(b) motion in the district court, the First Circuit declined to accept the defendant’s argument that the plaintiff’s decision not to timely appeal the dismissal order was the functional equivalent of a voluntary dismissal. Finally, I should note that the First Circuit recognized the fraudulent joinder exception to the voluntary-involuntary rule but did not apply in this case. The larger question, at least to me, remains: when is it proper to resort to interpretive aids or apply a presumption that the law is not intended to change federal common law, when concededly, as in Caribe Chem, the law that Congress enacted is not ambiguous and can be read broadly to reach a different result? Caribe Chem may have created a slippery slope that the clear and unambiguous text of a law is not enough to understand what Congress intended and opens the door to searching for common law doctrines. Caribe Chem's holding is hard to reconcile with the Supreme Court’s originalism or textualism. Note, I argued the appeal for the defendant.

Monday, December 18, 2023

Another failed injunction

The streak of losses continues in federal court for distributors in their quests for preliminary injunctions pendente lite. In Nilo Watch Parts, Inc. v. Rado Watch Co., Ltd., 2023 WL 5814264 (D.P.R. Sept. 2023) (Vélez-Rivé, J.), a retail store of Rado-branded watches sued its supplier for termination of its exclusivity right established in a distribution relationship without a formal written agreement (which meant that the court had to discern the parties’ course of dealings). The principal argued that the retailer failed to grow the market for the brand and focused on lower price-point watches instead of newer models like the diver watch “Captain Cook” that had an acceptance in the United States. The dealer's years-long downward trend in sales did not help its case. Essentially, the dealer tried to control or override the supplier’s worldwide sales and marketing practices by arguing that the Puerto Rican consumer preffered cheaper watches. Although it was not discussed in the opinion, the court excluded the dealer’s proffer of expert economic testimony to prove that market or economic conditions or force majeure affected sales. It all came to naught since the court, applying the traditional criteria for injunctive relief but tailored to Law 75 cases, concluded that the dealer had not shown a likelihood of success on the merits to rebut a showing of just cause for termination of the retailer’s exclusivity. The termination was grounded on the dealer’s failure to meet Rado’s “worldwide distribution standards” governing the course of dealings, which the dealer did not contest during the hearing. And, because the dealer continues to operate and remains in business with the Swatch brand, it could not prove irreparable harm. Instead of seeking to appropriate the dealer’s creation of goodwill for Rado, Rado offered alternative terms to transition the business from distributor to retailer which showed that its business decisions were not made in bad faith or arbitrary. For other reasons too, the court denied the injunction.

Sunday, December 17, 2023

Part II: The twists and turns of the new Civil Code's regulation of distribution relationships

By: Diana Pérez Seda, Esq. In a previous post we took a first close look at Chapter XV of Book Five of the New Civil Code of Puerto Rico enacted in 2020 because it includes Articles 1439-1447, which directly impact the rights and obligations of distributors and principals in a manner that demands the attention of those engaged in commercial relationships regulated by Law 75. The New Civil Code does not create new claims or causes of action. Rather, it essentially supplements and indirectly amends Law 75. Knowing all about how those articles came to be is indispensable to understanding the new scenarios principals and distributors face post-2020. Any in-depth study of a legal provision requires a detailed inspection of its text and legislative history, which includes the sequence of drafts leading up to the final approved text, the reports prepared by the various legislative commissions and any noteworthy event in the development of a legal provision. The Civil Code of 1930 was amended several times throughout the years to modify specific provisions as the needs arose. In the late nineties, Act No. 85 of August 16, 1997, was enacted to create the Joint Permanent Commission for the Revision and Reform of the Civil Code of Puerto Rico. This commission was composed of academics and practitioners of the highest caliber who worked for decades to produce multiple drafts. The New Civil Code of 2020 was, therefore, the product of thousands of hours of work by legal professionals with varied backgrounds and legal specialties. The direct legislative history of the New Civil Code reveals that the first draft was officially filed as House Bill 1654 on June 18, 2018. Interestingly, this draft did not include any of the provisions contained in Chapter XV of Book Five. Nothing in its legislative history has clued us as to why. The first time the articles are seen in the electronic file of House Bill 1654 is in the Substitute Bill of October 25, 2018, filed on January 30, 2019, which included Articles 1488-1496. A comparison shows that only one minor change is present between the Substitute Bill and the final New Civil Code. Essentially, Article 1494 of the Substitute Bill, which is equivalent to Article 1445 of the New Civil Code, had a subsection stating that the distribution contract would be deemed terminated after a bankruptcy judgment. That subsection was eliminated for the final version of the bill. Otherwise, the final version of the articles at issue was set with the Substitute Bill. It is with this Substitute Bill that the acts Exposition of Motives states for the first time that “[t]he division between civil obligations and contracts and commercial obligations and contracts is a constant source of confusion. Such a distinction lacks, for the most part, justification in today's context, as it does not lead to substantially different regulations.” It goes on to say that several different commercial contracts—including distribution—are now specifically regulated in Book Five of the Civil Code of 2020. This language, however, was taken ad verbatim from the Positive Report of the Substitute Bill of January 30, 2019. While House Bill 1654 has a specific history that began in 2018, the bill was the product of decades of work by the Joint Permanent Commission, as explained above. The articles at issue were not actually developed between the presentation of House Bill 1654 in June 2018 (where they were not present) and the Substitute Bill of October 2018 (where they appear). The articles were, in fact, present in prior drafts of the Civil Code developed by the Joint Permanent Commission for the Revision and Reform of the Civil Code of Puerto Rico. A Draft for Discussion and Explanatory Memorandum of 2004 contains the articles at issue as Articles 220-229. Some of the articles differ in significant ways from the language finally approved in 2020. For example, Article 222 of the 2004 draft stated that the “concession comprises all products manufactured or afforded by the concessionary, among which all new models are included.” The New Civil Code prefaces that same language with the caveat “unless otherwise agreed,” which is extremely significant because it recognizes that the parties may agree to exclude new models expressly from a distribution relationship. The flipside is, of course, that, unless excluded expressly, new models are automatically included within a distribution relationship. Another interesting difference is that Article 224 of the 2004 draft set a minimum of four years for distribution contracts. The New Civil code does not contain any limitation on the contract duration and does not regulate the duration. The draft is otherwise substantively very similar to the New Civil Code. A Draft for Discussion and Explanatory Memorandum of 2010 was also produced by the Joint Permanent Commission for the Revision and Reform of the Civil Code of Puerto Rico in 2010. Said draft contained the same articles at issue with the same language so nothing varied between 2004 and 2010. Both explanatory memoranda as well as the commentary to the New Civil Code note explain that the articles in question had their origin in the Draft Bill of the Civil Code of Argentina. The reason for this is that Argentina enacted a Civil Code in 2014 and during the time both the 2004 and 2010 drafts were developed by the Joint Permanent Commission for the Revision and Reform of the Civil Code of Puerto Rico academics from multiple jurisdictions in Latin America were regularly meeting at conferences and discussing and exchanging drafts. Argentina’s Civil Code of 2014 contains Articles 1502-1511 that deal with concessionaries and distributors. The 2004 and 2010 drafts of the Civil Code of Puerto Rico, as well as the New Civil Code of 2020, closely track these articles from the Civil Code of Argentina. There will certainly be future opportunities to dig deeper into the legislative history of the Civil Code of Argentina to discover the true origin of each article.

Wednesday, November 22, 2023

A Chapter in the new Civil Code of 2020 with Argentinian roots regulates distribution agreements protected by Law 75

By: Diana Pérez Seda, Esq. Principals and distributors alike should be looking very closely at their distribution agreements and course of business dealings along with their counsel as soon as practicable. Chapter XV- “La Concesión o Distribución” of Book Five of the New Civil Code of Puerto Rico enacted in 2020 includes a handful of provisions that potentially impact the rights and obligations of distributors and principals or grantors in the most significant way since the enactment of Law 75 fifty-nine years ago. A little dose of civil law 101 is in order. The purpose of a civil code is to generally prescribe what should happen in the absence of a special law or contract addressing a specific issue. A special law, in contrast, regulates a specific topic, like Law 75 does for distribution relationships. In fact, it is a basic law tenet that special laws supersede general laws when dealing with their specific subject matter. This was generally the case when dealing with distribution agreements, where Law 75 superseded the general principles of contract law laid out in the Civil Code of 1930. And that is still likely true now that the Civil Code of 2020 is in effect. Yet Articles 1439-1447 of the New Civil Code merit close study because the substance of these articles supplement Law 75 to a degree so substantial that they could be considered essentially an amendment to the special law. For starters, the last article in the chapter at issue, Article 1447, is perhaps the most interesting. It states that, “[t]he provisions of this chapter do not impair the rights of the concessionary or distributor under special laws applicable to distribution contracts.” On its surface this article declares what we described above as the basic law principle which states that special laws like Law 75 should supersede a general law like the Civil Code of 2020. Closer inspection of Article 1447’s language, however, potentially raises a myriad of questions: Why does it only expressly say that the rights of distributors are not impaired? Were these articles included in the Civil Code to benefit only distributors? Why not amend Law 75? One can speculate that amending Law 75 would have ruffled the feathers of many special interest groups that would have made its passage more difficult. One is left to wonder where this new Chapter came from. It appears to have been adopted, in part, from the “Código Civil y Comercial de la Nación”, Law 26.994 decree 1795/2014 of Argentina, which expressly applies to distribution contracts. The Argentinian Code also enacts a chapter to regulate franchises, but our Civil Code did not adopt those provisions. The Statement of Motives of the Civil Code of 2020 says that, “[t]he division between civil obligations and contracts and commercial obligations and contracts is a constant source of confusion. Such a distinction lacks, for the most part, justification in today's context, as it does not lead to substantially different regulations.” It goes on to say that several different commercial contracts—including distribution—are now specifically regulated in Book Five of the Civil Code of 2020. The Statement of Motives does little to shed light onto the reasons behind the inclusion of the articles at issue in the Civil Code of 202 and once again we are left with more questions than answers: Why does the legislator say that the division is a constant source of “confusion”? Confusion to whom? The courts? Distributors and principals? Article 1440 of the Civil Code of 2020 goes on to state that a concession may or may not be exclusive within the territory or convened zone of influence. Hence, unlike Law 75, the New Civil Code expressly recognizes exclusive arrangements and makes it patently clear that variations of exclusivity are all viable. Although exclusive relationships have certainly existed in multiple shapes and forms since before the enactment of Law 75, having the Civil Code of 2020 expressly recognize and, in a restricted sense, validate them, adds clarity. Article 1441(a) further states that “in absence of a contrary agreement: The concession includes all products manufactured or supplied by the grantor, including new models.” Subsections (b) and (c) states that no sub-concessions or assignments are allowed (in absence of a contrary agreement). Subsection (a) is, of course, the most interesting provision because it makes absolutely clear that, unless there is an express agreement excluding new products, distributors will have a right to distribute them. If the agreement is exclusive and, if new models of products are not expressly excluded, the distributor will have a right to exclusively distribute all new models of products. Given how a large proportion of disputes relates to the rights over the distribution of new products, these provisions should prompt both distributors and principals to look at their own relationships closely carefully. Furthermore, Article 1443 and 1444 list the essential obligations of principals and distributors, respectively. The lists include the typical and essential obligations of each type of actor and provide a baseline of what is expected from each side. If there is an ongoing relationship that has no written contract actors must carefully consider whether their business relationship has or should have the listed elements and whether perhaps formalizing the relationship in a written contract would be beneficial to all parties involved. A contract may, for example, specifically list each side’s obligations so that a breach can be readily identified. Historically, the breach of essential obligations was considered just cause under Law 75, but that could have changed with the Civil Code of 2020. For instance, Article 1445, lists the reasons for which a distribution agreement can be terminated. The article lists five reasons aside from “general contract termination reasons”: (a) the death or incapacity of the concessionaire; (b) the expiration of the agreed term; (c) serious or repeated breaches that reasonably cast doubt on the ability or intention of the non-compliant party to fulfill the remaining obligations; (d) the dissolution of either party, provided it does not result from a merger or split; or (e) in the event of dissolution through merger or split, if it significantly reduces the concessionaire's business volume. This list of causes for termination do not override the classic termination causes and presumptions listed in Articles 2 (just cause), 2A (presumptions) & 2B (just cause due to privatization) of Law 75. Of particular interest is subsection (c) of Article 1445 which states that termination is legal following “serious or repeated breaches that reasonably cast doubt of the ability or intention” of the other party to fulfil its obligations. There are several highly subjective and possibly ambiguous concepts in that subsection (“serious,” “repeated,” “reasonably,” “cast doubt,” “intention”) that will require careful documentation and consideration before action is taken to end a distribution relationship. Indeed, this new termination cause opens up a pandoras box for principals and distributors alike. All in all, the new Civil Code of 2020 provisions will likely create opportunity and concern depending on whose rights are at stake. They certainly demand that principals and distributors reflect upon their commercial relationships and whether they are in a stronger or more vulnerable position today than prior to the enactment of the Civil Code of 2020 and whether they should take prompt action. (Diana is a contributor of the blog and litigates Law 75 cases. CAB promoted Diana to income partner).

Monday, June 5, 2023

Supplier denied, on waiver grounds or outside the scope of Law 75, attorney’s fees it incurred to confirm arbitration award

In Conmed Corporation v. First Choice Prosthetic, 2023 WL 3647908 (N.D.N.Y. 2023), the Northern District granted the supplier First Choice’s motion to confirm an arbitration award and denied the distributor Conmed’s motion to vacate. Subsequently, First Choice moved to reconsider, arguing it was entitled to fee recovery under Law 75 in the proceedings to confirm the award. The federal court held: 1) that the movant did not meet the high standard for reconsideration under Rule 59(e) and had waived the argument; 2) an award of fees to a prevailing party supplier is discretionary under B. Fernandez v. Kellogg’s First Circuit’s reasoning where the supplier incurred in fees after prevailing in a preliminary injunction proceeding on appeal but had not prevailed by judgment on the ultimate merits; 3) the supplier’s motion to confirm is not a Law 75 action so that fee recovery is not contemplated under Law 75, and 4) in Casco, Inc. v. John Deere Construction, 596 F. 3d 359 (D.P.R. 2022), the District of Puerto Rico held that a distributor prevailing in a Law 75 action was entitled to fee recovery under parameters similar to Title VII or Section 1988 of the Civil Rights Act, and First Choice was no such distributor. Had First Choice preserved the argument, the court would have had to reach the issue whether the principal may recover attorney's fees in a Law 75 arbitration initiated by the distributor, provided it shows bad faith as a prevailing defendant must to recover its fees in a civil rights case.On another note, there is a fee recovery case pending on appeal to keep an eye on. That is, Holsum v. ITW Foods, where a defendant prevailed at trial in a breach of contract case and appealed from the district court’s denial of fee recovery. Essentially, Peerless argues that it is entitled to fee recovery by contract and for temerity under Rule 44.1. See 2023 WL 3479459 (CTA 1). A final observation. Fee recovery litigation has been the norm in civil rights cases. Until Casco v. John Deere and because Kellogg v. B. Fernandez involved the supplier's appeal from a preliminary injunction and not a fee claim by the distributor, there had been no reported cases in fee recovery for merits litigation under Law 75. I predict that with more litigants becoming aware of the standards for fee recovery in Law 75 cases there should be an uptick in collateral fee litigation as is the norm in civil rights cases.

Tuesday, May 30, 2023

Foodservice distributor loses Law 75 preliminary injunction and tests the boundaries of just cause from a brand consolidation in a case with unusual facts

A ruling on a preliminary injunction is not an adjudication on the merits but a preview of what the merits might bring. José Santiago v. Smithfield Packaged Meats, 66 F. 4th 329 (1st Cir. 2023), is significant for it tests the boundaries of the meaning of just cause from acts or omissions that are not attributable to the dealer. Specifically, when is it just cause for the principal to terminate a dealer’s contract after a bona fide impasse on the essential terms of the distribution relationship? There is a long line of cases on this subject but none on the facts squarely presented here. Santiago is Puerto Rico’s largest foodservice distributor with over $300 million in sales. It had a written exclusive contract for the sale and distribution of packaged meat products marketed and branded under the Farmland label. Smithfield acquired Farmland and merged into Smithfield as the surviving entity. Smithfield had appointed Ballester, another Puerto Rico distributor, for its Smithfield branded meat products. Some of the products that Ballester sold were rebranded Farmland products. Smithfield embarked on a “global SKU rationalization process” with the goal of consolidating brands and reducing product redundancies. Smithfield decided that all products would be marketed solely under the Smithfield brand. Smithfield offered Santiago to continue its exclusive distribution over Farmland until it was withdrawn. Importantly, Smithfield offered both distributors a non-exclusive relationship over the new Smithfield re-branded product lines. Smithfield later offered Santiago exclusivity over seven products that had been carved out from Ballester’s contract, but Santiago refused for it wanted exclusivity over the entire portfolio of 40 products. After an impasse, Smithfield terminated the relationship. The First Circuit disagreed with the District Court’s reasoning on two of three grounds for its denial of the injunction, but it affirmed. First, the court rejected Smithfield’s argument that Santiago had no protected dealer’s contract. It was counterintuitive said the court that, if Santiago performed the statutory functions of a dealer, it would not qualify as such because the parties did not execute the non-exclusive dealer’s contract for the products it continued to sell and distribute after the consolidation. Second, the court rejected Smithfield’s argument that its affirmative consent was essential for a finding of exclusivity from a course of dealings. “Smithfield claims to have continued filling JSI’s orders since February 2021 only “out of courtesy” and in hopes of eventually reaching an agreement. But Smithfield points to no evidence showing that it ever communicated to JSI that it was filling orders out of courtesy on an order-by-order basis, rather than as a continuation of the parties’ longstanding relationship. The parties’ course of dealing is to be defined by their observable behavior, rather than any subjective, unexpressed intent that one of them claims to have had. (citations omitted). And the evidence in the record strongly suggests that Smithfield continued filling JSI’s orders after February 2021 in the exact same manner as it had done before.” Finally, and key to its holding, following the long line of Medina and V. Suarez line of cases, the court affirmed because it held that the supplier had just cause for termination after a bona fide impasse following the consolidation and Santiago’s rejection of a non-exclusive agreement. Santiago’s exclusivity pretensions were unreasonable because the supplier had two distributors in P.R. for competing product lines and granting exclusivity to one over the other would disrupt the established relationships. Importantly, there was no evidence that the consolidation and the termination were done to appropriate the goodwill created by Santiago for the Farmland product line or was otherwise an arbitrary or bad faith decision. “To hold otherwise would be to render perfectly legal corporate and brand consolidations unduly problematic. Here, for example, two distributors apparently each enjoyed distributing similar products under different brands (and at least JSI did so exclusively). Following the brand consolidation, something had to give: Both distributors could not have conflicting rights over the same products. So unless we are to read Law 75 as precluding good-faith brand consolidations, we must conclude that the law allowed Smithfield to attempt to reallocate distribution rights in a manner that acknowledged the interests of both its distributors and its own legitimate interest in making its products available in Puerto Rico. Cf. Borg Warner, Official Translation at 23–24.” The court also discussed other grounds asserted for just cause, such as the timeliness of payments, and the criteria for injunctive relief in Law 75 cases, that are important to consider. In my view, the First Circuit’s opinion on the dealer’s exclusivity derived from its course of dealings implicitly revokes a rationale in Ramos v. Willert Home Products, 2023 WL 234758 (D.P.R. 2023)(Arias, J.), the case I blogged about recently, holding that exclusivity can only arise if the principal affirmatively consents to it. Rather, what counts are the terms of the written contract and the behavior of the parties consistent with exclusivity in performing with or without a written contract. The court’s main holding of just cause from a brand consolidation is both fact-intensive and not susceptible to bright-line rules. For Santiago in this case, losing the injunction is the result of a bad set of facts or aggressive business decisions coupled with the supplier’s business acumen and well-researched legal strategy.

Thursday, April 20, 2023

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

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

Wednesday, April 19, 2023

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

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

Monday, April 17, 2023

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

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

Tuesday, November 15, 2022

Are settlement agreements valid and enforceable under Law 75?

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

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

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

Friday, July 15, 2022

Non-exclusive distributor loses preliminary injunction in federal court

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

Monday, April 18, 2022

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

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

Wednesday, February 23, 2022

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

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

Monday, June 21, 2021

Intermediate P.R. Appellate Court refuses to enforce Judgment of German Court for medical devices supplier

Federal and local courts continue the conflict on the enforcement of choice of law and forum provisions in distribution agreements governed by Law 75. The latest case to join the fray is AAP Implante AG v. Caribbean Healthcare Supplies, Corp., 2021 WL 1589093 (TCA March 12, 2021). The Supreme Court of Puerto Rico has yet to consider this conflict. The distribution agreement there had a choice of law provision providing for the application of German Law and dispute resolution in Berlin, Germany. Supplier sued Puerto Rico distributor of medical devices for collection of monies in a German court and obtained a default judgment for over 260,000 Euros.The supplier filed an exequatur proceeding to validate the judgment in the Court of First Instance in Puerto Rico which dismissed the proceeding under Article 3-B of Law 75 which essentially provides that the law and forum of another jurisdiction chosen in the agreement violate Law 75’s public policy. Joining the chorus of other local court opinions addressing the same issue, but citing none, the appellate court affirmed the dismissal of the exequatur with a broad holding that any distribution agreement governed by Law 75 that incorporates the law and forum of any jurisdiction other than Puerto Rico violates public policy and is unenforceable. Because a judgment that violates public policy of the forum state is null and void, the court affirmed the dismissal of the exequatur proceeding.

Wednesday, March 3, 2021

Precedent-setting federal appellate court Law 75 decision

Franchising and distribution law aficionados take notice! In a published decision, Casco v. John Deere, No. 17-1570 & No. 17-1571, 990 F. 3d 1 (1st Cir. 2021), the First Circuit unanimously affirmed a million-dollar plus federal jury verdict in favor of the Puerto Rico dealer finding violations of Puerto Rico Law 75 from an impairment and termination of a dealership agreement. Since 1999-- and until this case-- the First Circuit had not passed judgment over a jury verdict in a Dealer's Contract Law 75 case. CAB represented the Puerto Rico dealer at trial and on appeal. Stay tuned. More to follow.

Monday, November 9, 2020

Federal district court awards summary judgment to principal in Law 75 case, in part, because distributor did not put money and legwork in the brand

In M30 Brands, LLC v. Riceland Foods, Inc., 2020 WL 6084138 (D.P.R. Oct. 15, 2020), the federal court granted the principal’s MSJ to dismiss claims brought by a Puerto Rico dealer under Law 75 for termination of a distribution agreement, and partially refused to dismiss an impairment claim from alleged lost sales caused by delayed shipments. The principal was a stateside supplier of rice. The distributor sold the principal’s rice overwhelmingly in the Virgin Islands and nominally in Puerto Rico. "At its core", Law 75 prevents terminations "once the distributor has put the money and legwork to successfully establish a brand in Puerto Rico." Op. at *2. "Absent Law 75, supplier could simply yank distribution rights away...". Id. The case was a dead duck from the start. 90% of the distributor’s rice sales occurred in the Virgin Islands. The distributor sold the balance, which did not amount to much, in Puerto Rico ($31,000 in 2016 and $22,000 in 2017). It is settled that extra-territorial sales do not count for damages under Law 75. Why? Because Law 75 provides coverage when a Puerto Rico dealer develops the market and clientele for the principal's products or services with customers in Puerto Rico. It was irrelevant that the distributor’s rice products were warehoused in and passed through Puerto Rico because what counts is whether customers in Puerto Rico purchased them. Applying the Goya and Palladio line of federal cases, which is the majority view, the court held that Law 75 did not apply to sales in the Virgin Islands. With the damages termination claim mortally wounded, the court found that there was just cause for termination of the distribution agreement from an interplay of two factors: a) the principal’s uncontroverted deposition testimony that the distributor’s sales in Puerto Rico were a drop in the bucket, and b) the distributor’s undisputed failure to do anything to market the sale of rice in Puerto Rico. The court gave more weight to failure to market rather than to sales performance, the latter being a factual question especially without an integrated distribution agreement specifying performance standards or metrics. As for the impairment claim based on allegations of price discrimination and unfair competition, the court did not buy them. It was dispositive that prices were lower for bulk sales of unprocessed and unpackaged rice to certain customers but higher for sales of branded products to the distributor as permitted by the agreement. The products were not similarly situated so that the contractual relationship was unaffected by the principal’s other rice sales. There is no final judgment as the court refused to dismiss the impairment claim based on allegations of delays in shipments as the principal could not demonstrate that the distributor did not suffer damages or lost sales directly attributable to those delays. The case is alive by a thread.

Saturday, April 4, 2020

Virtually, CAB remains in business during the COVID-19 pandemic

Alert to clients and friends!

During the pandemic, CAB remains open for business and is prepared to serve our clients from our homes. Before the Government of Puerto Rico announced its extension of the work at home and closure order until April 12, we announced ours to be safe. Our full-staff of attorneys and support employees stand ready and fully-equipped to manage the crisis and continue to serve our clients working remotely to provide the best service possible. Our attorneys have access to e-mail and are available to talk by cel. phone or video-conference. We are staying safe and hope you are too.

Contact us.

In a case of first impression: bankruptcy court rules that Law 75 arbitration award of damages is not part of a lender’s security interest

PRHS has won important victories in litigation and arbitration against Johnson & Johnson International and now against Banco Santander, a lender.

In Santander de Puerto Rico v. Puerto Rico Hospital Supply, Inc., ADV. PROC. No. 19-00448 (ESL), _____ B.R.____(D.P.R. April 3, 2020), the bankruptcy court for the District of Puerto Rico (Lamoutte, J.) in a thorough 25-page Opinion & Order granted the debtor’s PRHS’s motion to dismiss an adversary proceeding filed by the lender-creditor Banco Santander. Banco Santander has a security interest over the debtor’s receivables and other collateral, as specified in the instrument, to guarantee a commercial loan of $32 million.

Struck by both its principal supplier of medical products and devices Johnson & Johnson International's termination of the distribution agreements and Banco Santander's foreclosure of its security interest, PRHS filed for Chapter 11 bankruptcy. Vital for the debtor’s plan of reorganization is the estate’s claim over the million-dollar plus damages arbitration award against J&JI for its termination without just cause of a non-exclusive agreement (later confirmed by the federal district court and pending on appeal) and the ensuing claim of over $10 million for termination of the exclusive agreements pending in a parallel stayed federal case.

In the bankruptcy, the lender Santander claims that the proceeds of the arbitration award and the federal case belong to it as part of its collateral guaranteed by the security interest. In In re American Cartage, Inc., 656 F.3d 82, 88 (1st Cir. 2011), the First Circuit- itself addressing an issue of first impression under Massachusetts U.C.C. law- held that the lender’s security interest in that case did not extend over commercial tort claims. The question presented in the Santander adversary proceeding raised the same novel issues under Puerto Rico law.

First, the bankruptcy court ruled that the plain language of Law 75 creates a right of action for the tortious act of terminating a dealer’s contract. This meant that the proceeds of the arbitration award did not originate from the dealer’s performance of a contract or contract rights guaranteed by the collateral, but instead arose from a violation of tort law. Second, the Law 75 tort claim was a commercial tort claim instituted by a corporation within the meaning of Puerto Rico’s Uniform Commercial Code. As such, commercial tort claims do not fall within the meaning of accounts or intangibles in the U.C.C., and are thus, excluded from the collateral. Third, and dispositive as in In Re American Cartage, which the court found persuasive, Santander’s security interest did not specify commercial tort claims as part of its collateral. Fourth, the after-acquired damages award arose after the execution of Santander’s security agreement and the collateral instruments did not specify it, as held in In Re American Cartage.

CAB represents PRHS in the arbitration, in the federal confirmation proceeding and J&JI’s First Circuit appeal, and in the stayed federal litigation.

Wednesday, February 19, 2020

Commentary: What’s taking so long for judges to rule?

I’m digressing from the subject-matter of my Law 75 blog, for once in the past 11 years, to address an important and growing concern to me, and certainly to many other members of the bar. System-wide, many civil cases are languishing in our federal courts. We are now at a turning point in history where civil cases in our Puerto Rico Courts of First Instance are progressing faster than in federal court. We dwell about this topic informally, at least between lawyers, but rarely we put pencil to paper on it.

Now more than ever, an independent federal judiciary remains the last check and balance on the exercise of power by other branches of government and is the forum of choice to vindicate federal constitutional rights. This power assumes that judges will decide the cases that are brought before them and will do so reasonably promptly.

Time and again, our federal court in Puerto Rico shines in public opinion among the most trusted of institutions. The rule of law, judicial independence, and the fair and expeditious administration of justice should figure prominently in a favorable public opinion. But if judges at all levels take months or even years to decide motions and appeals, not only does this diminish the effectiveness of the judiciary as a check and balance on the abuse of power, but the public’s confidence in the rule of law is likely to be shattered.

The impact on the litigants themselves of an important motion or an appeal that remains undecided for months or years or a trial that is never heard should not be underestimated. Clients lose interest or money to continue litigating. Cases settle that should not be settled or are settled prematurely or not settled when they should be. Cases are voluntarily dismissed or abandoned. Priorities and expectations of clients change. Witnesses leave the company, their memories fade, or worse, they die. Companies are sold, closed, or go bankrupt. Individual parties may pass away without their cases ever heard. As the clock turns, the parties or their decision-makers, even lawyers, change, retire, or disappear from the action. Litigants demand answers from their attorneys and few satisfactory answers emerge to them from questions like: “why if you had to file a brief in 30 days or less and the court denied an extension of time has the court taken months or even a full presidential election cycle to decide your motion?” “When is the court going to decide?” You say, “the court is busy with many other older cases or others that have more priority or the criminal cases are taking too much time, but your motion will be listed in “Cheo”* after 6 months from the last filing, and all we can do is wait.” There is, of course, no federal or local rule of civil or appellate procedure obligating judges to decide motions within a date certain. But still, parties need and deserve prompt rulings.

Rights are not vindicated during a march that becomes eternal to judicial finality. The often-repeated motto rings true: “justice delayed is justice denied.” In 1986, then U.S. District Court Judge Hon. José A Fusté, who himself made his career in private practice, impressed upon me as his first law clerk about the importance of working diligently and overtime as he implemented his rocket docket to bring down a case load of over 550 cases with multi-party criminal prosecutions. Many judges then and now share the same strong work ethic day in and out.

As far as moving the wheels of justice, I have learned that a judicial opinion does not have to be in every case lengthy or perfect according to the Oxford Dictionary or the Blue Book or written for publication every time, but it should be the best effort to apply the law to the facts, expeditiously. When we, as litigants, start thinking about mandamus relief or filing informative motions that try to be creative with every topic imaginable to update the record just to reappear as a blip in the court’s radar screen, you share your client’s frustration that the case has been sitting for far too long.

A swift remedy in any form, be it in a lengthy published decision, a line order, or a bench ruling, serves well both the expectations of the parties and the administration of justice. This is essential for preserving the rule of law.*
* "Cheo" has been colloquially-speaking known over the past 30 years as a list or report that federal district judges in Puerto Rico are required to submit to the First Circuit Court of Appeals under the Civil Justice Reform Act of 1990 describing all the motions that have been submitted for 180 days or more without a ruling or cases over 3 years old that have not been resolved to judgment. There is no private right of action for a violation of the CJRA. Those CJRA lists should be available to the public in the Federal Judicial Center's web-site. "Cheo" comes from the saying in Spanish: "estás en las páginas de Cheo" which roughly means "you are on a watch list."

* This piece will be republished in the Newsletter of the Puerto Rico Chapter of the FBA.