Friday, July 15, 2022
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. After the injunction was doomed, so was the case. Although the record does not reflect the reasons or if there was any consideration behind it, the case was voluntarily dismissed by the stipulation of the parties.
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
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
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.
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
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.
Sunday, February 16, 2020
I’ve been writing for some time that, what parties stipulate in a contract matters, particularly forum and choice of law provisions in the event of disputes or litigation. In fact, this can be outcome determinative in many cases.
For stateside suppliers, the standard protocol should be an integrated written agreement with stateside choice of law provisions to the exclusion of Puerto Rico law and arbitration with both a locale and arbitrator selection in a state or dispute resolution in a state or federal court. What arbitration does is that it adds finality to the award. If the arbitrator gets it right or wrong, the parties have to live with that result. But the reward that a stateside arbitrator may enforce the contract and apply U.S. state law excluding Law 75, a decision that would generally be final under the FAA, is sufficiently attractive for suppliers to insist on those types of provisions in their dealer agreements. As the First Circuit ruled recently in a case, challenging an award under the FAA is figuratively “like climbing Mount Everest.” Dealers can and should be expected to resist this during contractual negotiations.
For Puerto Rico dealers, the standard protocol should be no written contract at all (this approach carries some uncertainty and risks) or if there’s a written contract requirement, apply Puerto Rico law to the exclusion of other laws and dispute resolution in Puerto Rico courts. For Puerto Rico dealers, arbitration is not necessarily an option that should be off the table as long as the arbitrator is selected from a list of Puerto Rico arbitrators, is required to apply Puerto Rico substantive law to the agreement or its termination, and the locale of the arbitration is in Puerto Rico.
There is no uniformity in U.S. state law on the question whether a choice of law provision in a dealer agreement selecting state law without regards to conflict of law rules will apply or exclude Puerto Rico law as a matter of public policy. Some states will apply Puerto Rico law and override state law because that state’s choice of law rules, patterned after the Restatement on Conflict of Laws, require applying the law of the state or territory that is vested with public policy. On the other hand, other states will honor the selected choice of law clause regardless of the public policy of another state, though there are exceptions for fraud or tort claims (on plain statutory language, a violation of Law 75 is a tort). When you add an arbitrator and not a court as the decision-maker on the question of what law applies, this adds another level of highly deferential scrutiny or finality to such determinations because the Federal Arbitration Act’s main policy is to enforce arbitration awards as written.
In Premium Tire v. Cooper Tire Company, AAA CASE No. 01-18-0002-4469, a single arbitrator in an arbitration supervised by the AAA in Ohio ruled that Law 75 applied to override an Ohio choice of law provision included within an arbitration provision in the dealer agreement because the termination claim alleged in the dealer’s counterclaim had a significant connection to Puerto Rico and Ohio choice of law rules required the application of Puerto Rico law to the arbitration proceedings as a matter of public policy. This is an example where state law directs the application of Law 75.But that may not be the case in other more business-friendly jurisdictions, like New York and Delaware, where freedom of contract overrides the public policy of other states or territories.
In the circumstances of the Ohio arbitration, a Puerto Rico court would probably also disregard the stateside choice of law provision, if it allows for termination of a dealer’s contract without just cause, because Law 75 expressly provides that such a waiver of Law 75 rights is illegal as a matter of public policy. Further, the FAA’s pro-arbitration policy does not compel an arbitrator to apply foreign law regardless of Law 75’s public policy. The FAA does not enlarge or subtract from the substantive rights of the parties, but enforces the agreement to arbitrate. The validity of contractual provisions is determined by state or Puerto Rico law, not the FAA. The FAA does not validate, without more, a choice of law provision included within an arbitration agreement simply because the FAA’s policy is to enforce the arbitration agreement as written.
Where the parties do not select Puerto Rico law expressly as the applicable law governing their agreements or choose to apply a state choice of law to a dealer’s contract that otherwise would be governed by Law 75, there is a potential for legal uncertainty and what substantive law governs can vary depending on the intricacies of different state laws.
Pick your state law wisely.
Tuesday, February 11, 2020
Mega-TV, a television producer in Florida and Puerto Rico, will soon broadcast a program "Profesionales de Primera" showcasing professionals in their fields (doctors, lawyers, and educators), describing their career trajectories. In my case, I tried to give a perspective about laws in Puerto Rico that protect entrepreneurs after they create a favorable market and clientele for the distribution of the products or services of manufacturers or suppliers.
The subject is relevant and important considering that the service and distribution industry in Puerto Rico accounts for roughly 20% of Puerto Rico's GDP. It cannot be ignored that, while federal grants or tax breaks to Puerto Rico have become politically unpalatable to some as means for our economic development, we have laws in our books that when used and properly applied can and should promote economic activity. In broad strokes, the upcoming interview will give me a chance to introduce representation statutes like Laws 75 and 21 in layman's terms to viewers in Florida and Puerto Rico as tools for entrepreneurs. I also provide practical tips to distributors and suppliers alike who have or are considering jump-starting distribution arrangements in Puerto Rico.
Excerpts of the interview in Spanish appear below:
Q. Existen leyes en PR que protegen a los empresarios en sus relaciones comerciales con los fabricantes?
Sí, la Ley 75 de 1964 protege a los distribuidores exclusivos y no-exclusivos y la Ley 21 de 1990 protege a los representantes de venta exclusivos.
Q. Porque estas leyes son importantes?
La industria de servicios y distribución aporta aproximadamente el 20% de la economía de Puerto Rico. Existen leyes en nuestros libros que estimulan el crecimiento empresarial y no dependen de la inyección de fondos federales o beneficios contributivos. Esencialmente, estas dos leyes están diseñadas para proteger al distribuidor y el representante de Puerto Rico, los cuales crean y desarrollan un mercado y clientela para los productos o servicios del principal, para que no le quiten o alteren sus derechos de representación sin justa causa o el pago de una justa compensación.
Q. Quienes están protegidos por estas leyes?
Por ejemplo, los distribuidores tradicionales que son intermediarios en la cadena de distribución entre el fabricante y la tienda en donde usted compra el producto.
Puede que también cualifiquen detallistas que venden directamente al consumidor. Aunque no lo crea, una tienda en un centro comercial que introduce o revende productos de una línea de un fabricante al consumidor, mantiene inventario, y hace promoción o mercadeo pudiera tener protección bajo la Ley 75.
Los representantes médicos que tienen exclusividad para representar productos por ventas a comisión a ciertos hospitales o proveedores médicos pudieran estar protegidos por la Ley 21.
Los franquiciados que operan franquicias pudieran estar protegidos por la Ley 75.
Q. Hay que hacer una inversión de dinero para tener la protección de estas leyes?
En las franquicias típicamente se requiere el pago de cuotas y regalías. Para un contrato de distribución, no es necesario pagar de antemano por los derechos de venta y distribución. Un distribuidor cualificado por lo general debe invertir en promoción y mercadeo para desarrollar la marca, pero no se requiere el pago de una cuota.
Q. Se necesita un acuerdo por escrito para estar protegido?
No es un requisito tener un acuerdo por escrito para cualificar como distribuidor o representante. Los acuerdos verbales son válidos y la ley cobija las relaciones establecidas cuando se compra, distribuye, y se revende la mercancía. Las relaciones comerciales pudieran estar protegidas sin la necesidad de un nombramiento verbal o por escrito.
Q. Se necesita tener exclusividad?
Para ser un distribuidor, no. La Ley 75 también protege a los distribuidores no exclusivos. Para ser un representante de ventas, sí. La Ley 21 requiere exclusividad sin definir que quiere decir.
Q. Que recomendaciones tiene usted para los distribuidores y representantes de ventas?
Puede que su negocio tenga una relación protegida por estas leyes y ni lo sepa. Si tiene un nombramiento de exclusividad o ha sido el único distribuidor o representante, es importante que lo documente por carta o contrato. La exclusividad es el activo más valioso de una empresa en la cadena de distribución.
Q. Que recomendaciones tiene para los fabricantes y manufactureros que quieren vender y distribuir productos en PR?
Asesórese. Ponga los acuerdos por escrito en un buen contrato. No se ponga a hacer negocios sin contrato.
Q. Cuales son los problemas que más usted ve en su práctica de leyes de distribución?
Hay muchos y diversos problemas, pero la mayoría son ocasionados por diferentes expectativas de negocios o problemas de comunicación entre los partes causados por la ausencia de contratos o contratos mal redactados.
Ejemplos de situaciones:
--Ventas en el territorio por otros distribuidores o ventas directas que interfieren con la exclusividad.
--Ventas por los clubes u otras tiendas nacionales, o ventas por el internet de productos que llegan a Puerto Rico.
--Cambios en los términos de pago o crédito.
--La imposición de cuotas o metas de compra o venta, sin ajustarse a las realidades del mercado de Puerto Rico.
Q. Cuáles son las consecuencias de violar estas leyes?
Pueden ser severas. Existe un remedio de interdicto provisional (“injunction”) para mantener la relación vigente mientras se dilucida el pleito. La compensación incluye la pérdida de beneficios y plusvalía, los costos del inventario y el valor de las inversiones en el negocio que no se pueden aprovechar por otras líneas. La medida de daños bajo la Ley 21 es un poco distinta ya que provee una compensación alterna basada en las ventas del representante. Sobre la Ley 75, esta dispone para el pago de honorarios de abogados y peritos si el distribuidor prevalece en el caso.
Wednesday, October 2, 2019
On May 9, 2019, this blog reported that a three-member panel of the AAA issued an award finding that Johnson & Johnson International terminated a non-exclusive distribution agreement without just cause in violation of Law 75 and awarded damages, fees, and interest to the dealer. Subsequently, the dealer moved in federal court to confirm the award under the FAA. The supplier moved to vacate the award under the Puerto Rico Arbitration Act (PRAA).
In Johnson & Johnson International v. Puerto Rico Hospital Supply, 2019 WL 4723892 (D.P.R. Sept. 25, 2019)(Besosa, J.), the court denied the motion to vacate and confirmed the award in its entirety. The court decided that the standards of review of arbitration awards under the FAA and the PRAA are different. Puerto Rico law permits review of arbitration awards under standards comparable to judicial review of determinations by administrative agencies and the FAA does not. The court held that the FAA governed here because the transactions at issue satisfied the "in commerce" requirement and a general Puerto Rico choice of law provision in the distribution agreement did not manifestly reflect an intent to have the PRAA govern judicial review of the award to the exclusion of the FAA. Applying the highly deferential standard in the FAA and the First Circuit's authoritative jurisprudence, the court held that "[t]he arbitration award sets forth a well-reasoned and methodical approach to the Law 75 dispute, citing the relevant statutes, case law, and evidence." The dealer stands to recover as a judgment almost $1.2 million in damages plus interest that continues to accrue until repayment.
Thursday, July 11, 2019
I came across an old case decided by Judge Jaime Pieras, Antilles Carpet, Inc. v. Milliken Design Center, 26 F. Supp. 2d 345, 348-349 (D.P.R. 1998), that discusses what evidence is relevant to goodwill damages in the context of a summary judgment motion, and there’s not much case law on this subject. This case involved a Law 75 dispute between a brand-name supplier of carpets and its Puerto Rico distributor. The parties disputed who terminated or impaired the relationship (the supplier denied a termination but the court found an issue of fact). The dispute also turned contentious on damages. The supplier urged that the distributor suffered no damages because it did not lose any revenues and clients from the termination. The court disagreed with the premise of the argument (though granted the MSJ on that ground because plaintiff failed to refute those allegations) since those are not the only two factors, citing a prior decision, to the effect that damages for lost profits are measured by Section 278(b).
On goodwill, the court found that the distributor’s deposition testimony (presumably not hearsay and otherwise admissible) created an issue of fact on whether reputational damage with clients suggests a possible loss of goodwill, which is an element of damages under Law 75. The witness said: “when you go to one of your major clients and say you no longer handle Milliken [the brand name], which is a major name in the carpet industry, it affects you image wise, and that's why I thought…”. The best evidence might have been testimony by the clients themselves but in this case was absent. The court granted and denied in part the MSJ but allowed the Law 75 claim to proceed on elements of damages other than lost revenues and clientele.
Wednesday, July 10, 2019
As I reported previously, a three-member panel of the International Center for Dispute Resolution of the American Arbitration Association by majority decision (former U.S. District Court Judge José A. Fusté and Manuel San Juan, Esq.) issued a 63-page Award in favor of the distributor Puerto Rico Hospital Supply finding that Johnson & Johnson International violated Law 75 by terminating a non-exclusive distribution agreement without just cause and awarding damages, costs, and fees in excess of $1.1 million plus interest. The Panel dismissed J&JI’s counterclaim of $540,000 with prejudice. Panelist Edgardo Cartagena, Esq. dissented on the Law 75 award and concurred on the dismissal of the counterclaim.
Puerto Rico Hospital Supply filed a motion in the U.S. District Court for the District of Puerto Rico in Civil No. 17-1405 (FAB) to confirm the Award as a judgment under the FAA and attached the Panel’s majority and dissenting decisions as exhibits.
Tuesday, July 9, 2019
Can a Puerto Rico corporation state a claim for Law 75 damages when it did not make a profit or loss on the sale of the relevant products, but a non-party related corporation did?
Heartland acquired the assets worldwide of the Splenda-branded sweetener from Johnson & Johnson in an asset purchase agreement (APA). Puerto Rico Supplies had been J&J’s distributor for Splenda and other consumer products in Puerto Rico. After the APA, Heartland considered various distribution alternatives and selected Plaza Provisions, its long-standing Puerto Rico distributor, for the new Splenda product line. After Puerto Rico Supplies wrote to Heartland claiming that it had become J&J’s successor and was bound to assume its prior relationship with J&J, Heartland filed a declaratory judgment action in federal court alleging, among other things, that it never conducted any business with Puerto Rico Supplies and it was not J&J’s successor under the APA. Puerto Rico Supplies counterclaimed for Law 75 termination damages and raised a bad faith claim under Article 1802 of the Civil Code. Puerto Rico Supplies decided not to sue J&J with whom it continued to have a business relationship for non-Splenda products. Heartland v. Puerto Rico Supplies Group, Inc., 2017 WL 432694 (D.P.R. 2017) (denying Heartland's motion to dismiss alleging that Johnson & Johnson was an indispensable party) provides an overview of the factual background prior to the summary judgment motion.
Discovery revealed that Puerto Rico Supplies, during the five-year period prior to the APA, had purchased Splenda and other products from J&J without a written agreement and transferred the Splenda inventory at cost to a non-party Premium Brands, Inc., an entity related to it by common ownership. It was Premium Brands the corporation that sold and distributed Splenda to customers in Puerto Rico and reported a gain or loss on those sales in its audited financial statements and tax returns. Both corporations operated for tax purposes as a pass through to reduce the tax liability of its owner. Mid-litigation, the two corporations merged and Puerto Rico Supplies became the sole surviving entity.
Heartland moved for summary judgment arguing, among other things, that the Law 75 claim had to be dismissed for lack of damages, an essential element of the claim. Heartland argued that First Circuit precedent in the Unilever case holds that the assets of separate corporations are distinct including the value of distribution contracts, and an affiliated corporation is not a party to an agreement under Law 75 simply because of its relationship to the signatory. Under this rationale, Puerto Rico Supplies, argued Heartland, suffered no damages under Law 75 because it transferred the Splenda inventory at cost and did not report a profit on any sales. Puerto Rico Supplies responded that for equitable reasons it should be allowed to reverse-pierce the veils of the corporations and treat both as one for Law 75 purposes. Puerto Rico Supplies also argued that both corporations functioned as a single entity with Premium Brands operating as a sales arm or division. Heartland countered that neither Puerto Rico nor Delaware law recognized standing to a corporate insider to reverse-pierce a corporate veil to state a claim to derive a financial or economic benefit and that the corporate separation of each had to be respected.
The issue was fully briefed on summary judgment but remained undecided by the pretrial conference.
The undersigned was lead counsel for Heartland in the case with CAB's Carla Loubriel and Diana Perez joining as attorneys of record.
The Franchising Forum of the American Bar Association released its new edition of the Franchise Desk Book, a two-volume compendium of franchising and relationship laws in selected states and Puerto Rico. This collection provides an overview of the legal requirements and standards in franchising and distribution laws and regulations in the United States and Puerto Rico. The Puerto Rico chapter has an overview of Law 75 and interpretive case law.
This author was a contributor to the Puerto Rico law chapter of this year’s edition of the Franchise Desk Book.
Enforcement of mandatory forum selection clause generates multiple/multi-state litigation and a mandamus petition in the First Circuit
Why do Puerto Rico distributors sign agreements with foreign or stateside forum selection and choice of law clauses when the performance of the agreement will be in Puerto Rico? What suppliers are after is obvious: to minimize the exposure to risk that comes from litigating Law 75 or Law 21 claims in Puerto Rico courts or the potential exposure to substantial economic damages. Of course, many distributors- often the principal players in the market- refuse to sign non-Puerto Rico forum or law provisions in distribution agreements routinely or as a policy or practice. What distributors want to avoid should be obvious too: prevent waivers of Law 75 rights.
Other distributors go ahead and sign those types of agreements often with little to no negotiation. Three reasons come to mind as to why they do and the first two are more probable than the third: 1) distributors lack commercial leverage and bargaining power or are not well informed and those clauses, which often include ADR provisions (arbitration and mediation), are deal breakers for the suppliers; 2) distributors, like other businesses, do a risk-reward analysis and knowingly and willingly assume the risk that comes with accepting those clauses as a condition to receive a new appointment leaving the fight to challenge those provisions in a Puerto Rico court for another day, or 3) the distributor is fraudulently induced to agree to ADR or forum selection provisions under false pretenses or with provisions that are hidden in fine print or reside in the internet for their click box acceptance. The third possibility presents one of the few and rare exceptions that may legally provide grounds to invalidate those types of clauses.
What should be clear is that once a distributor agrees to a written ADR or forum selection provision it is most probably stuck with it. Let’s be realistic, the chances are virtually nil that a federal court will invalidate a mandatory forum selection clause even in an agreement governed by Law 75. Chances in a Puerto Rico local court improve somewhat depending on the court or judge, but removal to federal court is likely to nip the local court’s intervention at its bud.
The case that I’m about to brief, Vitalife, Inc. v. Omniguide, Inc., 353 F. Supp. 3d 150 (D.P.R. 2018), is a run of the mill federal case validating a mandatory forum selection clause but with a twist of mandamus. There, a U.S. supplier of medical devices terminated unilaterally a distribution agreement with a Puerto Rico distributor. The Puerto Rico distributor threatened preliminary injunctive relief under Law 75, but the supplier quickly responded with a declaratory judgment action of its own in Massachusetts federal court. The agreement had both a mandatory forum selection clause and choice of law clause of Massachusetts. Not to be outdone, the distributor responded a day later with a suit in local Puerto Rico court for Law 75 termination damages and other remedies. The supplier removed the case to federal court on diversity jurisdiction grounds and moved to dismiss or transfer the case to enforce the forum selection clause.
Here comes the rub. The federal district court denied the supplier’s dispositive motion without prejudice. It’s not clear from the opinion why. Obviously, a denial without prejudice meant that, if the action in Puerto Rico moved forward, it would have mooted the forum selection clause. The order denying without prejudice a motion to dismiss on those grounds is not appealable. In a daring and bold move, the supplier filed a petition for a writ of mandamus in the First Circuit. The First Circuit denied the writ without prejudice pending a determination on the merits of the motion to dismiss or transfer the case to Massachusetts federal court.
After settlement negotiations failed, the federal court (Besosa, J.) in a thoughtful opinion discussing the relevant Supreme Court cases, analyzed the standards to evaluate transfer motions when there is an enforceable agreement with a mandatory forum selection clause. The court found that the relevant analysis did not require an evaluation of the private interests at stake in considering whether or not to transfer the case. As the federal court in this district has uniformly held in other cases, the court determined that Law 75’s provision invalidating litigation outside Puerto Rico yields to precedent enforcing mandatory forum selection provisions. The court in a footnote made it clear that it was not passing judgment on the validity of the choice of law provision. With that, the court transferred the case putting an end to the Puerto Rico litigation. Cf. Aurora Casket Company v. Caribbean Funeral Supply Corp., 2017 WL 5633102 (D.P.R. 2017) (granting in part transfer motion and severed claims against parties not signatories to agreement with forum selection clause).
How likely or not is it that the Massachusetts federal court will apply Law 75 to the agreement or its termination? That was the risk that this distributor apparently willingly or knowingly assumed at its own peril when it signed the agreement.
Thursday, May 9, 2019
This is a follow up of the Law 75 case that I reported previously in this blog. See November 18, 2018. After entry of a default judgment on the counterclaim resulting from the distributor Skytec’s misconduct in discovery and the lifting of the distributor’s bankruptcy stay, the district court in Skytec, Inc. v. Logistic Systems, Inc., 2019 WL 1271459 (D.P.R. 2019)(BJM) held a post-default hearing to determine the award of damages due Logistic. Logistic, a Montana company, contracted to develop and implement various dispatch, geographic information, and records systems for public safety agencies in Puerto Rico, which were Skytec’s local clients. The court awarded Logistic $3.2 million in program installations, license fees, service charges and assessed pre-judgment interest at the rate of 6% under the Civil Code.
Logistic, the purported principal, moved for an award of expert witness and attorney’s fees under Law 75. In the absence of any objection, the court awarded recovery of expert witness fees of $32,847. The court did not address the legal issue, because it was waived, that Law 75 tracks the intent of Section 1988 of the federal Civil Rights Act, and under federal law, a prevailing defendant can recover fees only upon a showing of temerity or contumacy. Not unsurprisingly, Logistic grounded the request for attorney’s fees on temerity under Rule 44, Law 75, and the subcontract agreements which made an award of reasonable fees mandatory to the prevailing party in an action.
Interestingly, and citing Section 278e of Law 75, the court found that plain statutory language does not require an award of attorney’s fees to be reasonable (quaere, if or because the Civil Rights Act upon which Section 278e rests does). “In every action filed pursuant to the provisions of this chapter, the court may allow the granting of attorney’s fees to the prevailing party, as well as a reasonable reimbursement of the expert’s fees.” Logistic proposed its attorney’s fees be calculated using the lodestar method, which is the First Circuit’s “method of choice for calculating fee awards.” The court believed that the attorneys had failed to present itemized billing statements to enable the court to scrutinize the entries and the services performed.
As to fees, the court’s assessment was that “attorney’s fees awarded in the District of Puerto Rico indicates hourly rates hovering around $250 to $300 for experienced attorneys, $150 to $200 for associates, and $100 for law clerks and paralegals.” The court reduced Logistic’s local lead counsel’s hourly rate from $325 to $275 “in light of his [thirty-five] years of experience.” Other less experienced attorney’s hourly rates were reduced to $150-$130.
As to an out-of-state law firm of Logistic requesting fees, the court determined that “Puerto Rico must serve as the relevant community to determine fees, rather than the law firm or lawyers’ community in the United States, i.e. Seattle, because there are local lawyers more than able to handle the civil litigation at issue in this case.” The court reduced the hourly fees of the stateside attorneys from a top of $570 to $300 and associates from $260-$335 billed per hour to $150 and paralegals and contract attorneys to $75 an hour. Based on the record and without a finding of temerity, the court awarded Logistic $758,915 in fees and $101,047 in expenses.
AAA ICDR Panel rules that Johnson & Johnson International violated Law 75 and awards damages, fees, and costs to Puerto Rico distributor in excess of $1.1 million plus interest
The proceeding between Claimant Puerto Rico Hospital Supply Group, Inc. (“PRHS”) and Respondent Johnson & Johnson International (“J&JI”) Case No. 01-17-0007-4506 before a three-member panel of the International Center for Dispute Resolution of the American Arbitration Association (referred to as the “AAA arbitration”) presented interesting and substantial questions under Puerto Rico Law 75, including:
«Is a termination actionable for damages when the manufacturer’s purported intention is to terminate all of the distribution agreements except one and its actions are consistent with a complete refusal to deal?
«Do preexisting financial motivations and economic interests of the manufacturer suggest that the business reason it ostensibly gives for a termination is a pretext?
«When is pretext sufficient to overcome the manufacturer’s proffer of just cause for termination?
«Must contractual payment terms that underlie the termination decision be reasonable and adjust to market conditions in the territory at relevant times?
«Does an offer of a payment and performance bond to secure the payment of a debt under the distribution agreement qualify as a payment in cash or its equivalent?
Claimant PRHS is one of Puerto Rico’s oldest and largest distributors of medical devices and products. For decades after 1964, PRHS sold and distributed Johnson & Johnson (and Ethicon) branded sutures and medical devices used in patient-critical surgical procedures by hospitals and other medical providers throughout Puerto Rico. There were various written distribution agreements in effect between the parties: most of the agreements were exclusive, but one was non-exclusive. The non-exclusive agreement had a mandatory arbitration provision while the exclusive agreements did not. J&J’s products represented approximately 20% of PRHS’s total sales, including roughly 5% for the non-exclusive product lines. There was a history of prior federal litigation between the parties that resulted, among other things, in agreeing to 90-day payment terms for all the contracts.
For the past 12 years, Puerto Rico’s economy has slumped leading up to the eventual public bankruptcy. Private and public hospitals have not been immune from this economic downturn and remain exposed to the mass migration of thousands of Puerto Rican residents (many are patients) to the mainland, the closing of beds and aisles in hospitals, and as if that were not enough, to catastrophic damages and business interruptions to the general population caused by Hurricanes Irma and María in 2017.
In 2015, the liquidity of hospitals grew tighter aggravating delays in payments to their suppliers, including to PRHS. While the days sales outstanding (DSO’s) of PRHS’s invoices to hospitals increased to roughly 183 days on average (some public hospitals took over 300 days to pay), PRHS’s distribution contracts with J&JI all had 90-day payment terms. During 2016, PRHS started falling behind in its payments to J&JI but continued making partial payments of millions of dollars.
J&JI decided to make a preemptive move to judicially enforce the 90-day payment terms. In March 2017, J&JI sued PRHS in federal court in Puerto Rico. J&JI requested a declaration that it had just cause under Law 75 to terminate all the agreements between the parties for non-payment of invoices and have PRHS cease and desist from using any of J&J’s brands and trademarks for the sale and distribution of its products. J&JI requested the collection of monies from PRHS exceeding $4.5 million allegedly due for products sold and delivered under all the agreements. What is more, J&JI filed a motion for preliminary injunctive relief to attach PRHS’s bank accounts to secure the payment of the total alleged debt. PRHS opposed the request for equitable relief and moved to dismiss or stay the action in favor of arbitration. J&JI resisted arbitration.
The federal court denied J&JI’s request for equitable relief and granted in part PRHS’s motion to dismiss and stay the case in favor of arbitration concerning the non-exclusive contract. See Johnson & Johnson v. Puerto Rico Hospital Supply, 258 F. Supp. 3d 255 (D.P.R. 2017) (granting, in part, motion to dismiss) and 322 F.R.D. 439 (D.P.R. 2017) (denying J&JI’s motion for reconsideration). The court explained the stay reasoning essentially that an arbitration award could be dispositive of issues and claims in the federal action and there is a possibility of inconsistent determinations if the two proceedings could move forward simultaneously.
Meanwhile, J&JI sent a notice to PRHS in September 2017 unilaterally terminating all the exclusive agreements ostensibly for lack of payment but informing PRHS that it had decided not to terminate the non-exclusive agreement with the arbitration clause (as if that could have prevented PRHS from initiating the court-sanctioned arbitration). The termination of the exclusive contracts would become effective a day after Hurricane María made landfall over Puerto Rico. By the effective termination date, J&JI also took over the direct sale and distribution to customers of all the products previously sold and distributed by PRHS. In October 2017, J&JI informed PRHS that it was not, among other things, authorized to place any purchase orders for any products of J&J’s brands and demanded the return of all the inventory. In November 2017, PRHS complied and returned all its inventory of J&J’s products, including the products sold under the non-exclusive agreement, which J&JI later resold to customers.
PRHS filed a Demand for Arbitration at the AAA alleging a claim under Law 75 for termination without just cause of the non-exclusive agreement and requesting damages over $400,000 plus an award of fees and costs. PRHS also filed a separate action in federal court in Puerto Rico (Civ. No. 17-2281 (DRD)) under Law 75 for termination of the exclusive contracts allegedly worth over $10 million. The federal actions were not consolidated. J&JI responded in the AAA arbitration with a counterclaim for collection of monies which, as amended during the hearings, allegedly exceeded $540,000.
After extensive discovery, seven days of evidentiary hearings, and the lifting of an automatic stay resulting from the distributor’s intervening Chapter 11 bankruptcy petition, on May 2, 2019, the AAA Panel rendered a final reasoned and written award. In a 63-page majority 2-1 decision (joined by Chair José A. Fusté and Manuel San Juan, Esq.) with one panelist concurring and dissenting in part (Edgardo Cartagena, Esq.), the Panel determined that J&JI had terminated the non-exclusive agreement and it had done so without just cause in violation of Law 75. The Panel awarded PRHS five years of lost profits on the line, the cost of the returned inventory, AAA fees, the pro rata share of fees it paid for panel compensation, attorney’s and expert witness fees as the prevailing party under Law 75, and costs and interest at the annual rate of 6.25% for a sum exceeding $1.1 million. The Panel credited fully the testimony on damages of PRHS’s expert Carlos Baralt, CPA. PRHS did not claim a loss of goodwill from the termination of the non-exclusive line. The Panel also unanimously concluded that J&JI had failed to prove the existence of the debt or its amount and dismissed the counterclaim with prejudice.
Whether or not there was just cause for termination was a fact-intensive question and the Panel heard live witness testimony and received in evidence documents relevant to this issue. Having its ultimate burden of persuasion on the issue of just cause and needing to rebut a legal presumption of lack of just cause in P.R. Laws Ann. tit. 10, 278a-1(b)(1) from having sold the products previously handled by the distributor, J&JI argued that PRHS’s breaches of the 90-day payment term, without more, were just cause under Law 75.
First, there is no actionable termination claim under Law 75 unless the manufacturer terminates the contract, but detrimental acts that impair the contract are also actionable. Once the distributor proves a termination or impairment of the agreement, the burden shifts to the manufacturer to prove just cause. The Panel determined that, although the manufacturer may proclaim in writing not to have terminated the non-exclusive agreement, its subsequent actions and course of conduct proved its intent to refuse to deal and effectuate a termination of all the contracts. The Panel found sufficient evidence of a termination of all the contracts from conduct by J&JI prohibiting PRHS from honoring any purchase orders from its customers for the sale of any products of J&J’s brands, from prohibiting the use of any trademarks for marketing purposes, from ordering the return of all products on inventory, and later selling the inventory directly to the distributor’s former customers. The Panel held that J&JI’s “intention in 2017 was simply to terminate all commercial relations with PRHS and move from an indirect to a direct sales strategy, completely cutting out PRHS from the equation.” Award at 31.
Second, the Panel observed that, under Puerto Rico law, lack of timely or complete payments is not just cause without considering the terms of the agreement, whether the payment terms are essential obligations or not, how material are the breaches, and the conduct of the parties. The Panel gave weight to J&JI’s inconsistent conduct alleging the termination of the exclusive agreements but not the non-exclusive agreement when the basis of the distributor’s alleged breaches of contract was identical. The evidence established that the 90-day payment term in the non-exclusive agreement was not an essential obligation because the supplier alleged to have kept the non-exclusive contract in full force and effect despite the defaults in payment.
Regardless, the Panel found that J&JI’s reasons proffered for the termination were pretextual. Pretext can rebut a showing of just cause under Law 75. Before PRHS fell behind in its payments, J&JI’s internal marketing plans and strategies had devised a plan to implement a direct distribution model to bypass its Puerto Rico distributor. The Panel also gave weight to evidence derived from J&JI’s audited financial statements filed as public records proving that its Puerto Rico division had operational losses at relevant times after its parent company divested itself of another franchise causing the loss of millions of dollars in sales. The Panel had sufficient evidence from which to infer that J&JI had a motive to appropriate for itself the market and clientele created by PRHS which gave way to a convenient excuse to terminate the agreements for lack of payment.
It was also highly probative that J&JI’s manager in Puerto Rico took credit in her job evaluation for implementing, after PRHS’s termination, a “PRHS legal strategy” to move the organization from an indirect model to a direct model for the Ethicon franchise. “[The Panel] finds that the need to increase revenue, and not PRHS’s payment delays, was the driving force” behind J&JI’s move to conveniently cut PRHS out of the market. (Award at 39).
The Panel also decided novel issues of Puerto Rico law which should be relevant to any manufacturer or supplier considering the termination of a dealer’s contract for lack of payment in the context of adverse economic or market conditions. Section 278a-1(c) of Law 75 provides that any “rules of conduct” or distribution quotas or goals in a dealer’s contract must adjust to the realities of the Puerto Rico market at the relevant moment of the dealer’s non-performance, or else, are unenforceable.
From plain language, context, and statutory history, the Panel concluded that the prohibition in Section 278a-1(c) was not limited to performance standards set in a distribution contract, but also applied to payment terms. Because J&JI failed to present any evidence that the 90-day payment terms- as standards of conduct- adjusted to the realities of the relevant health care market in Puerto Rico during 2016-2017, the Panel credited the testimony of PRHS’s experts Julio Galíndez, CPA and Gustavo Vélez that the payment terms were unreasonable, and therefore, null and void under Law 75.
In the end, critical to the Panel’s analysis of just cause was sufficient evidence that, a few weeks before the termination notice, PRHS made an offer to J&JI to guarantee payment in full of the total amount of the debt outstanding on all the agreements by posting a payment and performance bond. An internal J&JI’s memorandum prepared contemporaneously with the offer corroborated this evidence. J&JI rejected the offer out of hand without any serious consideration or explanation to PRHS. The Panel found that the payment and performance bond would have operated like cash in hand to J&JI because under Puerto Rico law a surety steps in to pay the creditor for a default in payment by the debtor. The Panel concluded that a payment and performance bond would have obviated any need to terminate the distributor. Accordingly, the Panel held that the rejection of the bond proposal was “unreasonable and ill-considered” (Award at 46) and “adds to the Panel’s suspicions of pretextual motivations.” (Award at 49). The dissenting panelist was of the view that the termination notice, without more, proved no termination of the non-exclusive agreement but concurred with the majority’s dismissal of J&JI’s counterclaim.
On this record, the Award made the distributor whole for the full amount requested of compensatory damages for termination of the non-exclusive agreement, fees, interest, and costs, and the manufacturer took nothing on its counterclaim. The final award is subject to judicial enforcement.
The author is lead counsel for the Puerto Rico distributor in the arbitration and related federal litigation. Heriberto Burgos, Mariano Mier, and Mercedes Rodriguez are part of CAB's litigation team.
Sunday, December 2, 2018
Casellas Alcover & Burgos, P.S.C., one of Puerto Rico’s leading commercial litigation and alternative dispute resolution law firms, has a new face on the web. We are excited to announce the launch of our new website at www.cabprlaw.com
Our goal with this new designed website is to create a user-friendly browsing experience for our trusted clients, potential customers, and other visitors. As it concerns Puerto Rico’s relationship statutes, the news section of the site has links to articles on Puerto Rico Law 75, including a piece our Junior Partner Carla Loubriel and I wrote on Litigating Dealer Termination Cases in Puerto Rico published in the Franchise Law Journal of the American Bar Association, and a short piece I wrote on preliminary injunctions under Law 75 and federal rules preemption for the Puerto Rico Chapter of the Federal Bar Association.
We invite you to enjoy our website and let us know what you think.