Wednesday, July 29, 2009

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

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

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

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

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

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

Tuesday, July 14, 2009

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

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

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

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

Wednesday, July 8, 2009

“Hot topics” in Law 75 litigation

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

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

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

Sunday, July 5, 2009

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

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