Wednesday, May 13, 2015

Local intermediate appellate court affirms Law 75 preliminary injunction issued under Next Step

Next Step v. Bromedicon, 2014 TSPR 30 ("Next Step") continues to produce different outcomes in the local trial courts and this could be explained by the different facts and circumstances or the equities of each case. What provides food for thought is that Next Step is tilting the balance in favor of a distributor's choice to sue in the local courts, as opposed to the federal court, when obtaining a preliminary injunction would be vital to ensure the survival of the distributor's business. One of the reasons for this is that, under Rule 65 of the Federal Rules of Civil Procedure, a federal court may not issue a preliminary injunction without proof that the traditional requirements for injunctive relief have been satisfied, which include proof of irreparable harm and likelihood of success on the merits. Next Step holds that the traditional requirements for injunctive relief are not mandatory for a statutory Law 75 injunction. It is debatable whether the statutory remedy of a preliminary injunction under Law 75 can override the norm that federal law controls matters of procedure even where the substantive law of the forum state supplies the rule of decision. The prospect that a preliminary injunction can be legally harder to obtain in federal court tilts the balance in favor of a distributor filing the action in the local court and the defendant removing the case to federal court.

In a recent case, Novavit, a Florida corporation engaged in the business of manufacturing and supplying “natural products”, executed an exclusive distribution agreement with Life Energy Inc., a Puerto Rico distributor. A few years into the relationship, the distributor complained that the supplier was not providing client leads for new business and was breaching the agreement by selling the products in the exclusive territory through another entity. What broke the proverbial camel’s back was that the supplier terminated the agreement because the distributor was selling products through the internet and had not made any purchases during a two month period. The distributor maintained that the agreement did not prohibit internet sales.

The distributor sued the supplier under Law 75 and requested preliminary injunctive relief to preserve the status quo. Life Energy Corp. v. Novavit, Inc. 2015 WL 1538250 (Feb. 25, 2015). After an evidentiary hearing, the trial court in San Juan (Hon. Angel Pagán) entered a preliminary injunction. On appeal, the supplier raised only two issues: 1) that the trial court erred by not dismissing the complaint against the individual defendants, and 2) that the trial court erred in concluding that the contract was amended to permit internet sales.

As to the first issue, the court held that it was waived as law of the case. The trial court had denied a motion for summary judgment on that same ground and the appellant had failed to file a timely appeal. Quaere, whether a denial of a motion for summary judgment becomes law of the case since review can still be had after a final judgment. What was clear, however, is that an appeal (certiorari) from a preliminary injunction does not allow interlocutory review of a prior order. As to the second issue, the court held that the trial court had not made a factual determination that the contract had been amended to permit internet sales. The injunction simply restrained the defendant from making defamatory statements against plaintiff that the products sold through the internet were false.

Citing Next Step and the legislative intent behind the “liberal” statutory remedy in Law 75, the appellate court held that the propriety of injunctive relief “depends in large measure” on whether the distributor proves prima facie that it qualifies as a protected Law 75 dealer. In the analysis, the court should consider the equities and the interests of the parties and the purposes served by the legislation. Id. at *6. The moving party has the burden to prove the damages that it would suffer if injunctive relief were to be denied, the impact to the public interest, and the reasons to enforce the agreement. According to the court, the existence of irreparable injury or the absence of just cause is not a required element for a preliminary injunction under Law 75.

The court affirmed the trial court’s order that plaintiff qualified as a Law 75 distributor and was worthy of injunctive relief in light of Next Step.

The appellate court’s decision in this case did not raise or involve a factual issue that, under Next Step, trial courts have discretion to deny injunctive relief based on any equitable defense, such as unclean hands, estoppel or laches. Next Step itself involved an order denying injunctive relief because the agreement there was non-exclusive and the scope of the remedy sought would have altered the status quo and re-written the agreement of the parties.