Sunday, January 8, 2012

Federal Court enforces arbitration award of $3.7 million under Law 75 in favor of Puerto Rico distributor

In Thomas Diaz Inc. v. Colombina, S.A., 2011 WL 6056717 (D.P.R. Dec. 6, 2011)(PG), Thomas Diaz Inc. (TDI), a Puerto Rico distributor of candies, successfully arbitrated a dispute with Colombina Inc., a Colombian corporation. The sole arbitrator was Angel (Paco) Rossy, a prominent retired Judge of the Court of Appeals of Puerto Rico. Arbitrator Rossy had been the Chairman of the Panel in the Mendez & Co. Inc. arbitration under Law 75 previously reported in this Blog. Mendez prevailed in the arbitration and recovered substantial damages.

After bifurcating liability from damages, the Arbitrator found that Colombina had terminated a forty-year relationship without just cause and awarded TDI substantial damages under Law 75 for lost profits, loss of goodwill, costs, legal interest and expenses. The Arbitrator adopted the contribution of revenues approach deducting only certain variable expenses- a methodology endorsed by the Ballester and Goya line of federal cases to compute five years worth of lost profits from a termination. For goodwill, the Arbitrator was persuaded by the capitalization of future earnings approach over the IRS excess earnings method, which came with a seal of approval by the Puerto Rico Supreme Court’s Dayco decision. The record does not reflect the reasons for the termination. It does not appear that the Arbitrator considered or awarded attorney’s fees to the prevailing party under Law 75. Colombina did not challenge the partial award finding no just cause for the termination.

In May 2010, TDI filed a motion (improperly denominated a “complaint”) to confirm the award in federal court under Section 9 of the FAA invoking the court’s diversity jurisdiction. Colombina filed a cross motion to vacate or modify the award. Following the Supreme Court’s Hall Street decision and noting the extremely deferential grounds for review of arbitration awards, the District Court (Perez-Gimenez,J) held that the FAA preempted Puerto Rico’s arbitration statute to the extent that it provides “lesser protection” for the enforcement of arbitration awards. The court then confirmed the award and denied the motion to vacate concluding that the Arbitrator’s Award is plausible, supported by the record, and based on valid legal principles. The court denied TDI’s request for attorney’s fees for the enforcement action finding that Colombina was not frivolous to challenge the award at least taking into account its size.

Colombina’s advocacy could not have helped its cause as the District Court found many of its arguments incomprehensible and deemed waived. Courts often wave goodbye and leave unpunished uncivil or overzealous litigation providing no deterrent for future misdeeds, but this Judge would have none of it as can be appreciated from the Court’s footnote:

“…When making reference to the Arbitrator’s Award, the Defendant’s motion to vacate (Docket No. 29) is riddled with empty phrases such as “blindly capricious ... adoption,” “blatant disregard of law,” “basic flawed assumption,” “such flawed logic,” “palpably faulty,” “patently absurd and faulty assumption,” “draconian windfall of punitive nature,” “magical tergiversational twist of ... financial realities” among others. The Court had to ferret through the motion in order ascertain the grounds of Defendant’s objections to the Arbitrator’s award. Therefore, to the extent the Defendant’s arguments were unclear or incomprehensible to this Court, the same are hereby disregarded.”

In the end, reasonable persons can disagree and take sides with the damages methodology of the Award, but the rule of law prevailed when the District Court, albeit not so promptly, confirmed the award into a Judgment.