Tuesday, December 22, 2009

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

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

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

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

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

Monday, December 21, 2009

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

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

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

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

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

Sunday, December 20, 2009

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

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

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

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