Thursday, December 8, 2016

Law 21 federal case dismissed for failing to meet jurisdictional amount requirement

Plaintiff Grupo Alimentaria had been an exclusive sales representative of food products of Defendant Conagra’s predecessor company. Conagra acquired the assets and liabilities of the predecessor, including Plaintiff’s contract. After a two-year relationship, Conagra terminated the agreement. In Grupo Alimentaria, LLC v. Conagra Foods, Inc., 2016 WL 5415651 (D.P.R. Sept. 28, 2016) (Gelpí, J.), Plaintiff sued Conagra in federal court and asserted a Law 21 claim for unjustified termination of the sales representative agreement and a Civil Law claim for breach of contract. The complaint alleged damages of $200,000.

Defendant moved to dismiss under Rule 12(b)(1) for not meeting the jurisdictional amount. The relevant First Circuit test shifts the burden to Plaintiff, once Defendant contests subject-matter jurisdiction, to prove with affidavits or an amended pleading that the claim is not to a legal certainty less than the jurisdictional amount in excess of $75,000.

Plaintiff had sold roughly $83,000 in 2013 or 2014 so that applying the stipulated commission rate of 3% to the average historical sales volume for the two-year term of the relationship and multiplying that sum by 5 in Law 21 did not exceed $7,000. Because Plaintiff did not plead facts for any other items of damages in Law 21 and recovery of future loss of earning potential is not allowed by the statute, the Law 21 claim did not meet the jurisdictional amount requirement. The court noted that no Supreme Court of Puerto Rico precedent had interpreted the damages provisions of Law 21. Without citing any authority, the court dismissed the Civil Code claim as duplicative or derivative of the Law 21 claim.

Monday, December 5, 2016

Lesson repeated: if you do not sue on time, you lose, and a distributor is again kicked out of court

This case turns on the scope and reach of an exclusive distribution relationship arising from a verbal agreement or a course of dealings and the application of the three-year statute of limitations for Law 75 actions. The lengthy opinion of the First Circuit may be explained, as described by the court itself, by the “Alice in Wonderland” quality of inconsistent arguments raised by the parties rather than the complexity of any of the substantive issues at stake.

In Medina & Medina, Inc. v. Hormel Foods, 840 F. 3d 26 (1st Cir. 2016), the thrust of the First Circuit’s holding is unremarkable and finds support in the court’s Basic Controlex and Butterball line of cases. That is, the distributor in Medina failed to file in court a Law 75 claim for impairment of a gentleman’s handshake agreement for the alleged exclusive distribution of the Hormel refrigerated retail line of provisions in Puerto Rico within three years after Medina knew or should reasonably have known of the facts supporting its claim. More than three years elapsed from the moment when Hormel first clearly informed Medina that its exclusivity did not extend to sales of Hormel’s refrigerated products made to customers outside of Puerto Rico for resale to club stores within Puerto Rico.

That being said, the First Circuit reinforces in this case settled doctrine that the contours of Law 75 rights, in the absence of a specific remedial provision in the statute, are defined by the verbal or written agreements between the parties. The case also answered the lingering question, albeit in dicta that, if the parties agreed to an exclusive distribution arrangement, there would be no antitrust implications from it.

About line extensions, the First Circuit also affirmed on the merits the district court’s separate ruling that Medina had no basis to claim that it had a right to new Hormel products because it did not prove that Hormel had obligated itself to sell to Medina every new refrigerated product it developed or that Hormel had sold any new products through another Puerto Rico-based distributor for the statutory presumption of lack of just cause to apply.

The First Circuit ratified the Gussco and Irvine line of cases, among others, holding that Law 75 protects contractually-acquired rights, so that if the principal agreed to grant “airtight exclusivity” (a concept not defined in Law 75) to prevent competing sales not only by Puerto Rico-based distributors but by resellers outside of the territory for resale within Puerto Rico, the principal would have to take prompt affirmative action to curtail those sales practices. Thus, held the court, “[t]he dependency of Law 75’s protection on the terms of the contract applies equally to the scope of any protected exclusivity.” And, Medina should have sued promptly after learning that Hormel had a different understanding of Medina’s contractually-acquired rights. For the same rationale, the First Circuit reversed the lower court’s refusal to dismiss Medina’s claim of impairment for sales of the “party-platter” product line in Costco because it also hinged on the time-barred exclusivity claim.

Looking back, the distributor in this case should have sued earlier than it did and that’s not rocket science. But, it is understandable from a business standpoint, though perilous, that the distributor would first try to negotiate better terms with the principal, request better pricing, or demand the principal to take affirmative steps to protect its territorial exclusivity from intrabrand competition before resorting to litigation that would irreparably damage their business relationship. Distributors face a Hobson's choice where you lose rights if you do not sue and lose the trust of the partner if you do. This can be attributed to civil code rules and judicial interpretations on prescription of actions. The message of this case is clear for the distributor to sue on time and then talk.

On the other hand, there are lessons to be learned by the principal, too. Never mind, that before Medina, Hormel had an unpleasant business experience with a distributor in Puerto Rico and had been dissuaded from going into the market knowing that Law 75, according to Hormel, was a “cut-throat” law. This makes it difficult to understand why Hormel would agree to do business with Medina without a written contract having all the bells and whistles to avoid the uncertainty and problems created by different understandings of the parties as to the scope and reach of exclusive distribution rights.

Wednesday, November 30, 2016

Risky Business: The Impact of Filing for Bankruptcy on Distribution Agreements

By: Sarika Angulo, Senior Associate at CAB and invited blog contributor.

It is widely known that Puerto Rico is presently in the midst of a major financial quandary. The Commonwealth has amassed over $73 billion dollars in government-debt alone. This economic downturn has led to many sources of financial distress, which has inevitably had a significant negative ripple effect on the private sector as a result of the brain drain to the mainland, the rise in unemployment, mortgage and foreclosure crises, and the tightening of consumer credit. In an effort to assist Puerto Rico put its fiscal house in order, Congress appointed a “Financial Oversight & Management Board for Puerto Rico” pursuant to “The Puerto Rico Oversight, Management, and Economic Stability Act.” See Public Law 114-187 of June 30, 2016, tit. 1, Art. 101(b)(2) (colloquially known as “PROMESA”).

While the abstract policies behind PROMESA are laudable as they are aimed at reducing costs drastically, increase revenues, and expand economic growth, a comprehensive and concrete plan to abate the crisis is yet to be outlined. Until then, this financial uncertainty may continue to have dire consequences for the private sector. Local businesses bearing the brunt of a sluggish economy may have no other option but to turn to the last resort of filing for bankruptcy to obtain a respite and perhaps start anew. But, if the local business that files for bankruptcy is a party to an ongoing distribution agreement, what happens to the agreement as of the time of the filing of the bankruptcy petition? Does the agreement remain in full force and effect, thereby becoming property of the debtor’s (distributor) bankruptcy estate or is it automatically terminated? If the latter, does such “termination” constitute a breach of the distribution agreement by the debtor/distributor? If so, can such breach by the debtor/distributor be considered “just cause” to terminate the distributorship under Puerto Rico’s Dealer and Franchise Statute (commonly known as “Act 75”)? See P.R. Laws Ann. tit. 10, §§278 et seq.

A thorough research on these issues has yielded only one case from the District of Puerto Rico. In American Healthcare Corp. v. Beiersdorf, Inc., 2006 WL 753001 (D.P.R. March 23, 2006), the Court addressed this particular controversy, but in the context of a Chapter 11 reorganization. There, the court held that there was no valid basis for a Law 75 claim after the dealer’s contract had been rejected and did not become part of the estate in a Chapter 11 proceeding. So, Plaintiff was not the “owner” of any dealer’s contract or had no valid basis to assert a subsequent judicial claim under Law 75 against the principal because it breached the contract by rejecting it.

Accordingly, based on controlling case law, here I address what could be expected to occur to an ongoing distribution agreement at the time of the filing of a bankruptcy petition by the debtor/distributor as seen through the prism of Chapter 11. Under the U.S. Bankruptcy Code (the “Code”), Chapter 11 is ordinarily used by businesses to reorganize their debts and continue operating. When a debtor files for relief under this chapter, an estate in bankruptcy is created. See 11 U.S.C §541(a).This estate may include contracts, such as executory contracts. While the Code has an expansive provision addressing “executory contracts” (see 11 U.S.C. §365), as well as an elaborate section defining the terms contained therein, it does not describe the term “executory contracts.” For this reason, courts and practitioners alike have adopted the definition coined by Professor Vern Countryman of Harvard Law School in a 1973 article in the Minnesota Law Review where he defined such contracts as “a contract under which the obligation of both the bankrupt and the other party to the contract are so far unperformed that the failure of either to complete performance would constitute a material breach excusing the performance of the other.” See Vern Countryman, Executory Contracts in Bankruptcy: Part I, 57 Minn. L. Rev. 439, 460 (1974). Under this definition, an ongoing distribution agreement under Act 75 falls squarely within the meaning of “executory contract.” See American Healthcare Corp. v. Beiersdorf, Inc., 2006 WL 753001, at *2.

Despite the cult status enjoyed by Countryman’s test, some courts have departed from it as they believe the test is too static and rigid, creating a higher threshold for the definition of an executory contract than Congress intended. See, e.g., In re Riodizio, Inc., 204 B.R. 417 (Bankr. S.D.N.Y. 1997) (citing Mitchell v. Streets (In re Streets & Beard Farm P’ship), 882 F.2d 233 (7th Cir. 1989)); In re Spectrum Info. Tech., Inc., 190 B.R. 741 (Bankr. E.D.N.Y. 1996). Instead, these courts have replaced Countryman’s test with a more functional approach under which the focus is on whether or not the estate will benefit from the assumption or rejection of the contract. See In re Gen. Dev. Corp., 84 F.3d 1364 (11th Cir. 1996); see also In re Cardinal Indus., 146 B.R. 720 (Bankr. S.D. Ohio 1992). The U.S. Bankruptcy Court for the District of Puerto Rico is one of these courts. See American Healthcare Corp., 2006 WL 753001, supra.

Under this functional approach —which Puerto Rico follows— if the debtor wishes to continue with an executory contract because it considers it to be a valuable asset of the bankruptcy estate, it may request leave of Court to assume the contract. See 11 U.S.C. §365(a). On the other hand, if it deems the contract to be too onerous and cumbersome, the debtor may likewise request the Court to reject it. Id. Although the debtor may, under the Code, select which executory contract to assume or reject, the debtor cannot cherry pick particular clauses to assume or reject. The executory contract must be entirely assumed or entirely rejected. See American Healthcare Corp., 2006 WL 753001, at *3.

Now, the rejection of a distribution agreement by a Chapter 11 debtor entails certain critical consequences, particularly where an interplay exists between the rejection and Act 75. This is so because for Chapter 11 purposes a rejection of an executory contract (in this case the distribution agreement) constitutes a breach of contract. See 11 U.S.C. §365(g)(1) and 502(g). Under Act 75, an entire breach of the contract by the distributor constitutes “just cause” for the termination of the distributorship by the principal. See P.R. Laws Ann. Tit. 10 §§278(d), 278a, 278a-1. In other words, the principal can walk away from the distribution agreement without any liability. That means that the principal will not be liable to the debtor/distributor for damages, which pursuant to Act 75 encompass the amount of the profits obtained in the distribution of the merchandise or in the rendering of the services, as the case may be, during the last five (5) years, or if less than five (5), five (5) times the average of the annual profit obtained during the last years, whatever they may be (see P.R. Laws Ann. Tit. 10 §278(b)) and, should the debtor/distributor be the prevailing party, attorneys’ fees. See P.R. Laws Ann. Tit. 10 §278e.

As history has shown, a dire financial environment is a breeding ground for bankruptcies. In a distributorship context, trends have proven that bankruptcy filings seldom occur without warning as they are generally reasonably foreseeable based on signs of financial distress shown by the distributor. Nevertheless, many of these signs are not readily identified until it is too late for the principal to intervene. For that reason, principals should be keenly alert to an inclination by the debtor to repeatedly incur in financial delinquencies and/or request debt restructuring. In such circumstances, legal counsel should always be consulted to ensure proper analysis to devise the most appropriate course of action in order to reach a favorable outcome for all parties involved.

Monday, July 11, 2016

A dealer’s expectation of a promise of future exclusive rights does not convert a clearly non-exclusive Law 75 contract into an exclusive contract

Caribe RX Service Inc. v. Grifols Inc., ____D.P.R.___(June 30, 2016)(Judgment without opinion), is another case on appeal from the issuance of a Law 75 preliminary injunction. Caribe RX is a Puerto Rico dealer of plasma medical products. Grifols, the supplier, appointed Caribe RX in a written contract as an exclusive dealer of certain products (GBI) but non-exclusive as to others (GTI). What is more, during pre-contractual dealings, Grifols told Caribe that it could not grant exclusive rights over GTI products as Caribe RX wanted because of existing distribution relationships with other resellers in Puerto Rico. The written agreement expressly captured the essence of those representations and included an integration clause that superseded prior representations making the written agreement the only agreement between the parties.

Caribe RX filed a complaint for Law 75 impairment in local court and moved for a preliminary injunction claiming that the reseller Cardinal Health 120 Inc. was interfering in P.R. with its “verbal” exclusive rights over the clearly non-exclusive GTI products in the agreement. After unsuccessful attempts to remove the case to federal court and on remand to dismiss the case to enforce a mandatory North Carolina choice of forum clause in the agreement, the trial court held a hearing and granted a preliminary injunction barring Grifols from selling any and all GBI and GTI products except through Caribe RX. The intermediate appellate court affirmed, reasoning that the testimony of Caribe’s President (a lawyer) to the effect that Caribe had an expectation of a promise to obtain future exclusive distribution rights over GTI products reflected the true intention of the parties- which Grifols did not controvert with verbal testimony at the hearing. It is important to stress that there was no allegation of error, fraud or deceit either in the formation or the performance of the contract. As the Supreme Court later made clear by reversing the appellate court, the written agreement should have been the "best evidence" reflecting the intent of the parties.

In a brief Judgment, the Supreme Court held that Next Step I controlled and reversed that portion of the preliminary injunction that granted the dealer exclusive distribution rights over GTI products and affirmed the injunction over GBI (although there was no proof on record that Grifols had ever sold any GBI products through anyone other than Caribe RX, but Caribe offered testimony that Grifols advertised those products for sale through the internet). The court agreed that the preliminary injunction erroneously granted exclusive rights which the dealer never had.

Three Justices of the court wrote a 31-page separate concurring opinion. In an insightful opinion worthy of the days when Justice Trias Monge searched for answers in Spanish Civil Code commentators, Justice Anabelle Rodríguez, would have held that a party’s pre-contractual expectation of exclusive rights cannot supersede the clear and unambiguous terms of the contract. She wrote that a contrary result would frustrate legitimate expectations and the duty of loyalty inherent in contractual obligations. Justice Rodríguez did a commendable job in reconciling the apparent conflict between the Civil Code’s provision that states that literal provisions of a contract, when clear, must be strictly observed, with the mandate that a trier of fact should consider prior, coetaneous, and subsequent acts of the parties to determine the true intention. She wrote that, "to dispel any suspicions of what was intended", the dealer’s pre-contractual expectations never rose to the formation of a bilateral contract because the principal was willing to consider granting future exclusive rights over GTI depending on circumstances but could not do so presently because of other dealers in the territory. This is also what the contract said in no uncertain terms.

The concurring opinion is a fine template of the law that should be followed when courts interpret civil and commercial contracts.

CAB’s Carla Loubriel and the undersigned defended Grifols at the preliminary injunction hearing and at the intermediate court of appeals.

Waiver of just cause defense neither moots nor makes issuance of Law 75 preliminary injunction automatic

In Next Step v. Bromedicon, 190 D.P.R. 474 (P.R. 2014)(“Next Step I”), the court held that the issuance of a Law 75 preliminary injunction to a dealer, that qualified for protection, required weighing the policies served by the statute and balancing all the relevant interests. The traditional standards for preliminary injunctions are relevant but do not necessarily apply in this context, although traditional defenses to equitable relief, such as laches and estoppel, still apply.

Another Next Step case, Next Step v. Biomet Inc., 2016 TSPR 120 (2016), involved Biomet’s termination of a Law 75 contract after the dealer’s distribution rights had been expressly assumed by the principal’s successor. After the trial court scheduled a preliminary injunction hearing, the principal admitted lack of just cause and argued that the request for a preliminary injunction had become moot for all that remained was a prompt hearing on damages. The trial court agreed with the principal. The intermediate appellate court not only reversed but, concluding that the principal had admitted lack of just cause, entered a preliminary injunction on appeal without a hearing.

This procedural imbroglio came before the P.R. Supreme Court on two issues, first, whether the principal’s admission of liability mooted the preliminary injunction remedy (it did not), and two, did the appellate court err by granting a preliminary injunction on appeal (it did). The preliminary injunction, held the court, was not moot. The purpose of the Law 75 provisional remedy was to lessen the impact to the dealer from its loss of the dealer’s contract until a final judgment on the merits. Because the case was not over only with an admission of lack of just cause, the provisional remedy was not moot. The intermediate appellate court, however, erred in granting the preliminary injunction without a hearing because the dealer still had the burden to prove the reality of its damages and that the balancing of the relevant factors justified injunctive relief under Next Step I. The case was remanded for further proceedings.

Thursday, June 16, 2016

Law 75 dispute between Florida supplier and Puerto Rico reseller of fish and seafood products stays in Puerto Rico federal court after a finding of fraudulent joinder

The underlying issue on the merits of this case is whether the Puerto Rico reseller (Sea World) has any basis to claim an exclusive distribution relationship protected by Law 75. The dispute began when the reseller's counsel threatened, in a letter, to sue for damages when, after many months of the reseller's failure to place even one purchase order for product, the supplier (Seafarers) sold product to a competing Puerto Rico reseller (Axa).

Not to be outdone, Seafarers first filed suit in federal court for declaratory judgment based on diversity of citizenship. Sea World's next move was to sue Seafarers in local Puerto Rico court for alleged impairment damages under Law 75 from sales made to Axa, the competing reseller, and also requested preliminary injunctive relief. Sea World also joined Axa as a defendant in the local court case alleging tortious interference and this would have defeated removal to federal court for lack of complete diversity of citizenship. The local court quickly scheduled a preliminary injunction hearing, but Seafarers timely removed the case to federal court depriving the local court of jurisdiction. Seafarers alleged that Axa, the diversity-defeating Puerto Rico co-defendant, should be disregarded for fraudulent joinder. The federal court would have diversity jurisdiction but for Axa's fraudulent joinder in the case.

In the second and removed federal case, Sea World LLC v. Seafarers Inc., 2016 WL 3258360 (D.P.R. June 10, 2016)(PG), the plaintiff Sea World moved to remand the action alleging that Axa had not timely joined Seafarers' notice of removal and its claim of tortious interference under Puerto Rico law defeated the allegation of fraudulent joinder. The federal court denied the motion to remand. The court first held that Axa's two-day delay in joining the notice of removal complied with the unanimity requirement in the interest of justice. In any event, Axa's joinder for removal was moot because the court found fraudulent joinder. Seafarers also argued that Sea World's reactive and subsequent suit in local court after the first-filed federal case demonstrated an improper purpose to circumvent federal jurisdiction, but the court did not have to reach that issue to find fraudulent joinder.

The court articulated the test of fraudulent joinder as whether Sea World stated a cognizable claim of tortious interference under the Rule 12(b)(6) standard. It held it did not. Puerto Rico law does not recognize a tortious interference claim of an alleged distribution contract with an indefinite term. Plaintiff Sea World failed to allege in its complaint that the alleged exclusive distribution agreement with Seafarers (with which Axa is said to have been interfering) had a fixed term or duration. Failing to state a valid claim against Axa, the court found fraudulent joinder and determined it had subject matter jurisdiction, thus ending the procedural chess match in local and federal courts. Pending before the federal court in the two cases are motions for consolidation.

CAB represents the supplier Seafarers Inc. in these cases. Natalia Morales and this author are counsel of record for the supplier in the federal cases.

Monday, May 16, 2016

First Circuit affirms dismissal of Law 75 action as barred by the three-year limitations period

In Trafon Group, Inc. v. Butterball, LLC, 2016 WL 1732742 (1st Cir. May 2, 2016), the First Circuit affirmed both an order denying a preliminary injunction and the ensuing judgment dismissing a Law 75 action as time-barred. A Puerto Rico-based wholesale food distributor, Trafon, acquired certain assets from Packers Provisions including an existing distribution agreement with Butterball for whole bird and turkey products. The Asset Purchase Agreement (APA) did not reference an alleged exclusive distribution relationship between Packers and Butterball. Nor did Trafon secure the manufacturer’s consent or a representation of exclusivity prior to completing the asset purchase transaction. While Trafon may have believed that the distribution rights it had acquired were exclusive, Butterball disagreed and openly refuted the allegations of exclusivity in its counsel’s letter of October 2009 and in disclaimers made in each subsequent invoice. Trafon sued Butterball in September, 2013 after Butterball had made sales to Costco and refused to pay commissions on direct sales made during 2011 and 2012.

Essentially, the legal issue on appeal was when did the Law 75 claim accrue to start the running of the three-year limitations period? Did it begin to run in October 2009 when on notice of Butterball’s repudiation of the allegation of exclusivity or when it started to sell product directly in 2011? Applying Basic Controlex v. Klockner, 202 F. 3d 450 (1st Cir. 2000), the First Circuit held that the limitations period began to run from Butterball’s counsel’s letter in October, 2009 and the action filed in September, 2013 was time-barred.

At least three lessons could be learned from the facts and the court’s holding. The first and most obvious is that a proper due diligence protocol in the APA transaction should have required obtaining the manufacturer’s consent or written confirmation of an alleged existing exclusive distributorship appointment before making the purchase. The second lesson can be that clear and unequivocal notice of the supplier’s repudiation of exclusivity triggers the running of the statute of limitations and a direct sale of an exclusive product is not necessary for an impairment claim to accrue under Law 75. The third lesson may be to state the obvious: Trafon should have sued for injunctive relief earlier than it did and not wait for Butterball to commit a more costly breach.

This author was Butterball’s outside counsel before the litigation.

Monday, March 21, 2016

Federal court grants supplier's motion for summary judgment dismissing Law 75 case for lack of timely payment

There are a number of permutations for when lack of timely payment may or may not be just cause as a material breach of contract under Law 75. The legal proposition is that paying on time is "normally" one of the dealer's essential obligations, the breach of which may be just cause for termination. But that proposition has never been an absolute rule because paying on time is not always an essential obligation. Saying otherwise that, as a matter of law, paying of time is always essential would lead to absurd or unjust results (for example, is late payment by one day of one invoice automatically just cause to terminate a long-standing business relationship?) or may ignore the commercial reality of the relevant industry, the terms of the contract itself, or the course of conduct of the parties.

Any notion that paying late or making incomplete payments is always or automatically just cause when the supplier protests, is legally incorrect and misguided. Paying on time is not essential and may not be just cause in at least three situations: when an integrated contract specifies all of the dealer's essential obligations and excludes timely payments (the Casco vs. John Deere contract was of this mold) or in the unusual situation where the supplier is not serious about or accepts late payments. To add to the mix, a dealer may also allege and prove to the trier of fact (as in Casco vs. John Deere) that the dealer's alleged breach of contract was a subterfuge or a pretext to terminate the agreement for ulterior motives or that the supplier contributed to payment problems.

But, when the dealer's contract clearly specifies that paying on time is essential and there is no evidence of a subterfuge or pretext and nothing on record indicates that the supplier has not cared about late payments (and what it has meant to "care or not" depends on the facts of each case) courts have uniformly granted summary judgment in the supplier's favor.

Kemko Food Distributors Inc. v. Schreiber Foods Inc., 2016 WL 814833 (D.P.R. Feb. 29, 2016)(Hon. Pedro Delgado, J.), is one of those cases where the contract and the facts hurt the dealer.

There, a supplier of food service products appointed the Puerto Rico dealer as its exclusive distributor, but the contract expressly made the appointment contigent on both making timely payments and making sales efforts. For 18 consecutive months before the termination, the dealer paid late and it became a serious concern to the supplier. Judge Delgado recognized situations where timely payments are not essential obligations and found them to be inapplicable to the facts of that case. With undisputed evidence of a breach of an essential payment obligation in the contract and absent any proof of a pretext or subterfuge, the court granted the supplier's motion for summary judgment.

Monday, March 14, 2016

Luck of the draw in jury selection

Last week I tried to verdict in federal court a dealer termination case under Law 75. Fortunately, the jury favored my client, a Puerto Rico dealer, with an award covering 100% of the Law 75 claims.

Statistics show that 99% of federal civil cases are dismissed before reaching the jury, either by dispositive motions or settlements. In fact, my last Law 75 federal jury trial, representing the manufacturer, had been 6 years ago, and I settled before the jury took the case. The Casco v. John Deere case I tried last week, after three years of intense litigation against competent defense counsel, was the first Law 75 case to reach a jury in many years. Mind you that, while a lot of Law 75 cases are bench-tried in the local courts, there's no right to trial by jury in Puerto Rico and the only civil jury cases are heard in the federal court. And, the civil cases tried in our federal district court in Puerto Rico are few and far between and almost none is a commercial case. Criminal cases overwhelm the federal docket and there is no time or judicial resources for the few labor employment or civil rights cases that actually get tried.

It is no wonder then that the art of trying a case before a jury is getting lost. Even more perplexing, is the jury selection process in which lawyers get no meaningful participation in the voir dire to question the venire and the jurors that actually get picked are more of a lucky draw than a consciencious or scientific effort at jury selection.

Jury cases of Law 75 claims are so rare, that I'd like to share my insights into the backgrounds of the jurors that actually tried our case and the jurors who unanimously found for the dealer. These thoughts never get published except by word of mouth from some of the older or more experienced members of our federal bar.

Jury venire in the Casco v. John Deere case was composed of roughly 36 candidates. Some were excused for cause, either for medical reasons or some had prior travel arrangements or commitments or knew the lawyers or their law firms etc. For example, one of the potential jurors worked as a clerk for my firm's external auditors and was stricken for cause. From those who remained after 3 peremptories or strikes per side, the jury was initially composed of 4 men and 4 women. After a number of back-to-back recesses called by the Judge mid-trial, a middle-aged female juror had become sick or extenuated, from two weeks of trial or most likely after eating a federal lunch pack, and was rightly excused for cause. The remaining 4 men and 3 women were representive of all walks of life. We had an administrative assistant of a multinational corporation, two engineers, an attendant of an auto parts store, a public school physical education teacher, an accounts receivable clerk in a newspaper, and a housewife. There were no accountants or financial analysts per se in the jury, except perhaps for the accounts receivable clerk who must have known basic math and the engineers who have a fuller understanding of science and mathematics. I don't think, however, the two engineers had post-graduate degrees. Although their age was not disclosed, I guess that most were between the ages of 32-55. All lived in different municipalities across all over Puerto Rico, except for one juror from San Juan. As expected, fluency in English was mixed. The Judge required the second venire (the second pool of jurors who are left after others from the first badge are excused for cause) to read out loud on the record their responses to a set of a few boilerplate questions, such as, where they live and work and what their family members do for a living. Most of the jurors were naturally so soft-spoken in the intimidating courtroom environment that at least I could barely hear what they said. From what may have been a 20 second narrative by each of roughly 20 persons, the lawyers are supposed to discern all the facts to make an informed judgment to select the jury. No interrogation by counsel is allowed. Also, from this brief narrative, which is the only words ever spoken by a juror in the case, except for an individual assent to the verdict after a poll, you can tell about their fluency in English, sort of. In this case, jurors clearly spoke and understood English but not as a first language but some were actually very fluent. I'd say most spoke English like most Puertorricans do as a second language. The only common denominator, that may or may not have been relevant, is that none of the jurors had served before in any other case, civil or criminal, which implies that all had a fresh or open mind and were not contaminated by experiences in other cases. Judgment came after more than two hours of deliberations.

Full of energy and enthusiasm after eating their nutritious federal lunch packs, our jury reached a unanimous verdict before the rush hour on a sunny Friday afternoon and left the court for home.


Saturday, March 12, 2016

John Deere Construction and Forestry Company gets hit with federal jury verdict in dealer termination case


On November 8, 2018, a panel of the Court of Appeals for the First Circuit (Howard, Thompson, and Kayatta, J.) heard oral argument on Deere's appeal from the jury verdict finding Law 75 liability and awarding damages and Casco's cross-appeal from the dismissal of the dolus Civil Code claim. A ruling by the First Circuit is generally issued within three months after oral argument.


Last Friday, March 11, 2016, a federal jury in the U.S. District Court of Puerto Rico found defendant John Deere Construction & Forestry Company liable for termination of a 27 year-old dealer's contract without just cause under Law 75 and awarded plaintiff Casco, the Puerto Rico distributor, impairment and termination damages of $1,763,934.

This is the first Law 75 case to reach a federal jury verdict in recent memory.

The federal court's pretrial in limine rulings in Casco v. John Deere (published in Westlaw) provide a more developed background of the disputes and claims between the parties than I will attempt here. In summary, Casco, a Puerto Rican distributor of construction equipment, claimed that John Deere, one of the leading manufacturers of construction equipment in the United States, terminated unilaterally the dealer's contract in 2013 without just cause and impaired the contract by cancelling in 2012 a purchase order for the sale of a John Deere excavator worth $268,000.

Only the separate claims for impairment and termination under Law 75 reached the jury. At trial, the Court (Hon. Pedro Delgado Hernandez, J) dismissed the dolus (fraud) claim holding that the alleged predicate for fraud of constructive termination of the contract in 2009 was not actionable under Puerto Rico Law 75, a pure issue of law and one of first impression with the P.R. Supreme Court. Mid-trial, as noted, the Court granted John Deere's Rule 50 motion to dismiss the dolus claim for fraudulent inducement and fraudulent performance of contract and also entered judgment for John Deere on its counterclaim for collection of a debt of roughly $200,000.

About Casco's success on the Law 75 claims, the Jury must have found that John Deere's ostensible reasons stated in two letters for the impairment and subsequent termination were false or a pretext. The jury credited Casco's version of the events that John Deere retaliated or discriminated against its Puerto Rican dealer over many years as a vendetta for the dealer's owner's business affiliation with Volvo Construction, a competitor.

Substantial evidence was introduced at trial that John Deere treated its Puerto Rican distributor differently from other construction equipment dealers in Latin America or the United States. Those other dealers received grace periods to comply with John Deere's requirements and were invited to attend important dealer conferences. Casco received no breaks and was the only dealer excluded from the dealer conferences. John Deere's executives admitted to being upset at Casco for standing up for its rights for many commercial issues in their relationship, and more upsetting was to John Deere its business dealings with Volvo. The John Deere dealer agreement with Casco also did not have a non-compete obligation, as do many of John Deere's newer dealer contracts with other distributors.

After a two-week trial and over two hours of deliberations, the Jury awarded Casco impairment damages of $323,440 and termination damages of $1,440,494, fully compensating Casco for 100% of its Law 75 claims. Puerto Rico law does not permit punitive damages. Puerto Rico Law 75 has a cost-shifting provision requiring the Court to award reasonable attorney's and expert witness fees in the dealer's favor as the prevailing party, and those fees are expected to be substantial in this case.

This author Ricardo Casellas was lead trial counsel for the dealer Casco in this case and CAB's attorneys Heriberto Burgos and Sarika Angulo and paralegal Mercedes Rodriguez formed CAB's team. Plaintiff's damages expert was Reynaldo Quinones Marquez, CPA, and Gustavo Velez, an economist who testified about market conditions affecting the construction industry in Puerto Rico. For defendant, Dr. Freyre, an economist, testified as rebuttal expert on damages.