Wednesday, October 2, 2019

Federal Court confirms arbitration award as a judgment for the dealer under Law 75

On May 9, 2019, this blog reported that a three-member panel of the AAA issued an award finding that Johnson & Johnson International terminated a non-exclusive distribution agreement without just cause in violation of Law 75 and awarded damages, fees, and interest to the dealer. Subsequently, the dealer moved in federal court to confirm the award under the FAA. The supplier moved to vacate the award under the Puerto Rico Arbitration Act (PRAA).

In Johnson & Johnson International v. Puerto Rico Hospital Supply, 2019 WL 4723892 (D.P.R. Sept. 25, 2019)(Besosa, J.), the court denied the motion to vacate and confirmed the award in its entirety. The court decided that the standards of review of arbitration awards under the FAA and the PRAA are different. Puerto Rico law permits review of arbitration awards under standards comparable to judicial review of determinations by administrative agencies and the FAA does not. The court held that the FAA governed here because the transactions at issue satisfied the "in commerce" requirement and a general Puerto Rico choice of law provision in the distribution agreement did not manifestly reflect an intent to have the PRAA govern judicial review of the award to the exclusion of the FAA. Applying the highly deferential standard in the FAA and the First Circuit's authoritative jurisprudence, the court held that "[t]he arbitration award sets forth a well-reasoned and methodical approach to the Law 75 dispute, citing the relevant statutes, case law, and evidence." The dealer stands to recover as a judgment almost $1.2 million in damages plus interest that continues to accrue until repayment.

Thursday, July 11, 2019

Reputation damage with clients after a termination suggests a possible loss of goodwill

I came across an old case decided by Judge Jaime Pieras, Antilles Carpet, Inc. v. Milliken Design Center, 26 F. Supp. 2d 345, 348-349 (D.P.R. 1998), that discusses what evidence is relevant to goodwill damages in the context of a summary judgment motion, and there’s not much case law on this subject. This case involved a Law 75 dispute between a brand-name supplier of carpets and its Puerto Rico distributor. The parties disputed who terminated or impaired the relationship (the supplier denied a termination but the court found an issue of fact). The dispute also turned contentious on damages. The supplier urged that the distributor suffered no damages because it did not lose any revenues and clients from the termination. The court disagreed with the premise of the argument (though granted the MSJ on that ground because plaintiff failed to refute those allegations) since those are not the only two factors, citing a prior decision, to the effect that damages for lost profits are measured by Section 278(b).

On goodwill, the court found that the distributor’s deposition testimony (presumably not hearsay and otherwise admissible) created an issue of fact on whether reputational damage with clients suggests a possible loss of goodwill, which is an element of damages under Law 75. The witness said: “when you go to one of your major clients and say you no longer handle Milliken [the brand name], which is a major name in the carpet industry, it affects you image wise, and that's why I thought…”. The best evidence might have been testimony by the clients themselves but in this case was absent. The court granted and denied in part the MSJ but allowed the Law 75 claim to proceed on elements of damages other than lost revenues and clientele.

Wednesday, July 10, 2019

AAA Arbitration Award under Law 75 is published in federal court confirmation proceedings

As I reported previously, a three-member panel of the International Center for Dispute Resolution of the American Arbitration Association by majority decision (former U.S. District Court Judge José A. Fusté and Manuel San Juan, Esq.) issued a 63-page Award in favor of the distributor Puerto Rico Hospital Supply finding that Johnson & Johnson International violated Law 75 by terminating a non-exclusive distribution agreement without just cause and awarding damages, costs, and fees in excess of $1.1 million plus interest. The Panel dismissed J&JI’s counterclaim of $540,000 with prejudice. Panelist Edgardo Cartagena, Esq. dissented on the Law 75 award and concurred on the dismissal of the counterclaim.

Puerto Rico Hospital Supply filed a motion in the U.S. District Court for the District of Puerto Rico in Civil No. 17-1405 (FAB) to confirm the Award as a judgment under the FAA and attached the Panel’s majority and dissenting decisions as exhibits.

Tuesday, July 9, 2019

Can a Puerto Rico corporation state a claim for Law 75 damages when it did not make a profit or loss on the sale of the relevant products, but a non-party related corporation did?

Heartland acquired the assets worldwide of the Splenda-branded sweetener from Johnson & Johnson in an asset purchase agreement (APA). Puerto Rico Supplies had been J&J’s distributor for Splenda and other consumer products in Puerto Rico. After the APA, Heartland considered various distribution alternatives and selected Plaza Provisions, its long-standing Puerto Rico distributor, for the new Splenda product line. After Puerto Rico Supplies wrote to Heartland claiming that it had become J&J’s successor and was bound to assume its prior relationship with J&J, Heartland filed a declaratory judgment action in federal court alleging, among other things, that it never conducted any business with Puerto Rico Supplies and it was not J&J’s successor under the APA. Puerto Rico Supplies counterclaimed for Law 75 termination damages and raised a bad faith claim under Article 1802 of the Civil Code. Puerto Rico Supplies decided not to sue J&J with whom it continued to have a business relationship for non-Splenda products. Heartland v. Puerto Rico Supplies Group, Inc., 2017 WL 432694 (D.P.R. 2017) (denying Heartland's motion to dismiss alleging that Johnson & Johnson was an indispensable party) provides an overview of the factual background prior to the summary judgment motion.

Discovery revealed that Puerto Rico Supplies, during the five-year period prior to the APA, had purchased Splenda and other products from J&J without a written agreement and transferred the Splenda inventory at cost to a non-party Premium Brands, Inc., an entity related to it by common ownership. It was Premium Brands the corporation that sold and distributed Splenda to customers in Puerto Rico and reported a gain or loss on those sales in its audited financial statements and tax returns. Both corporations operated for tax purposes as a pass through to reduce the tax liability of its owner. Mid-litigation, the two corporations merged and Puerto Rico Supplies became the sole surviving entity.

Heartland moved for summary judgment arguing, among other things, that the Law 75 claim had to be dismissed for lack of damages, an essential element of the claim. Heartland argued that First Circuit precedent in the Unilever case holds that the assets of separate corporations are distinct including the value of distribution contracts, and an affiliated corporation is not a party to an agreement under Law 75 simply because of its relationship to the signatory. Under this rationale, Puerto Rico Supplies, argued Heartland, suffered no damages under Law 75 because it transferred the Splenda inventory at cost and did not report a profit on any sales. Puerto Rico Supplies responded that for equitable reasons it should be allowed to reverse-pierce the veils of the corporations and treat both as one for Law 75 purposes. Puerto Rico Supplies also argued that both corporations functioned as a single entity with Premium Brands operating as a sales arm or division. Heartland countered that neither Puerto Rico nor Delaware law recognized standing to a corporate insider to reverse-pierce a corporate veil to state a claim to derive a financial or economic benefit and that the corporate separation of each had to be respected.

The issue was fully briefed on summary judgment but remained undecided by the pretrial conference.

The undersigned was lead counsel for Heartland in the case with CAB's Carla Loubriel and Diana Perez joining as attorneys of record.

New edition of the ABA’s Franchise Desk Book has been released

The Franchising Forum of the American Bar Association released its new edition of the Franchise Desk Book, a two-volume compendium of franchising and relationship laws in selected states and Puerto Rico. This collection provides an overview of the legal requirements and standards in franchising and distribution laws and regulations in the United States and Puerto Rico. The Puerto Rico chapter has an overview of Law 75 and interpretive case law.

This author was a contributor to the Puerto Rico law chapter of this year’s edition of the Franchise Desk Book.

Enforcement of mandatory forum selection clause generates multiple/multi-state litigation and a mandamus petition in the First Circuit

Why do Puerto Rico distributors sign agreements with foreign or stateside forum selection and choice of law clauses when the performance of the agreement will be in Puerto Rico? What suppliers are after is obvious: to minimize the exposure to risk that comes from litigating Law 75 or Law 21 claims in Puerto Rico courts or the potential exposure to substantial economic damages. Of course, many distributors- often the principal players in the market- refuse to sign non-Puerto Rico forum or law provisions in distribution agreements routinely or as a policy or practice. What distributors want to avoid should be obvious too: prevent waivers of Law 75 rights.

Other distributors go ahead and sign those types of agreements often with little to no negotiation. Three reasons come to mind as to why they do and the first two are more probable than the third: 1) distributors lack commercial leverage and bargaining power or are not well informed and those clauses, which often include ADR provisions (arbitration and mediation), are deal breakers for the suppliers; 2) distributors, like other businesses, do a risk-reward analysis and knowingly and willingly assume the risk that comes with accepting those clauses as a condition to receive a new appointment leaving the fight to challenge those provisions in a Puerto Rico court for another day, or 3) the distributor is fraudulently induced to agree to ADR or forum selection provisions under false pretenses or with provisions that are hidden in fine print or reside in the internet for their click box acceptance. The third possibility presents one of the few and rare exceptions that may legally provide grounds to invalidate those types of clauses.

What should be clear is that once a distributor agrees to a written ADR or forum selection provision it is most probably stuck with it. Let’s be realistic, the chances are virtually nil that a federal court will invalidate a mandatory forum selection clause even in an agreement governed by Law 75. Chances in a Puerto Rico local court improve somewhat depending on the court or judge, but removal to federal court is likely to nip the local court’s intervention at its bud.

The case that I’m about to brief, Vitalife, Inc. v. Omniguide, Inc., 353 F. Supp. 3d 150 (D.P.R. 2018), is a run of the mill federal case validating a mandatory forum selection clause but with a twist of mandamus. There, a U.S. supplier of medical devices terminated unilaterally a distribution agreement with a Puerto Rico distributor. The Puerto Rico distributor threatened preliminary injunctive relief under Law 75, but the supplier quickly responded with a declaratory judgment action of its own in Massachusetts federal court. The agreement had both a mandatory forum selection clause and choice of law clause of Massachusetts. Not to be outdone, the distributor responded a day later with a suit in local Puerto Rico court for Law 75 termination damages and other remedies. The supplier removed the case to federal court on diversity jurisdiction grounds and moved to dismiss or transfer the case to enforce the forum selection clause.

Here comes the rub. The federal district court denied the supplier’s dispositive motion without prejudice. It’s not clear from the opinion why. Obviously, a denial without prejudice meant that, if the action in Puerto Rico moved forward, it would have mooted the forum selection clause. The order denying without prejudice a motion to dismiss on those grounds is not appealable. In a daring and bold move, the supplier filed a petition for a writ of mandamus in the First Circuit. The First Circuit denied the writ without prejudice pending a determination on the merits of the motion to dismiss or transfer the case to Massachusetts federal court.

After settlement negotiations failed, the federal court (Besosa, J.) in a thoughtful opinion discussing the relevant Supreme Court cases, analyzed the standards to evaluate transfer motions when there is an enforceable agreement with a mandatory forum selection clause. The court found that the relevant analysis did not require an evaluation of the private interests at stake in considering whether or not to transfer the case. As the federal court in this district has uniformly held in other cases, the court determined that Law 75’s provision invalidating litigation outside Puerto Rico yields to precedent enforcing mandatory forum selection provisions. The court in a footnote made it clear that it was not passing judgment on the validity of the choice of law provision. With that, the court transferred the case putting an end to the Puerto Rico litigation. Cf. Aurora Casket Company v. Caribbean Funeral Supply Corp., 2017 WL 5633102 (D.P.R. 2017) (granting in part transfer motion and severed claims against parties not signatories to agreement with forum selection clause).

How likely or not is it that the Massachusetts federal court will apply Law 75 to the agreement or its termination? That was the risk that this distributor apparently willingly or knowingly assumed at its own peril when it signed the agreement.

Thursday, May 9, 2019

Collateral fee issues under Law 75 litigated in post-default judgment proceedings

This is a follow up of the Law 75 case that I reported previously in this blog. See November 18, 2018. After entry of a default judgment on the counterclaim resulting from the distributor Skytec’s misconduct in discovery and the lifting of the distributor’s bankruptcy stay, the district court in Skytec, Inc. v. Logistic Systems, Inc., 2019 WL 1271459 (D.P.R. 2019)(BJM) held a post-default hearing to determine the award of damages due Logistic. Logistic, a Montana company, contracted to develop and implement various dispatch, geographic information, and records systems for public safety agencies in Puerto Rico, which were Skytec’s local clients. The court awarded Logistic $3.2 million in program installations, license fees, service charges and assessed pre-judgment interest at the rate of 6% under the Civil Code.

Logistic, the purported principal, moved for an award of expert witness and attorney’s fees under Law 75. In the absence of any objection, the court awarded recovery of expert witness fees of $32,847. The court did not address the legal issue, because it was waived, that Law 75 tracks the intent of Section 1988 of the federal Civil Rights Act, and under federal law, a prevailing defendant can recover fees only upon a showing of temerity or contumacy. Not unsurprisingly, Logistic grounded the request for attorney’s fees on temerity under Rule 44, Law 75, and the subcontract agreements which made an award of reasonable fees mandatory to the prevailing party in an action.

Interestingly, and citing Section 278e of Law 75, the court found that plain statutory language does not require an award of attorney’s fees to be reasonable (quaere, if or because the Civil Rights Act upon which Section 278e rests does). “In every action filed pursuant to the provisions of this chapter, the court may allow the granting of attorney’s fees to the prevailing party, as well as a reasonable reimbursement of the expert’s fees.” Logistic proposed its attorney’s fees be calculated using the lodestar method, which is the First Circuit’s “method of choice for calculating fee awards.” The court believed that the attorneys had failed to present itemized billing statements to enable the court to scrutinize the entries and the services performed.

As to fees, the court’s assessment was that “attorney’s fees awarded in the District of Puerto Rico indicates hourly rates hovering around $250 to $300 for experienced attorneys, $150 to $200 for associates, and $100 for law clerks and paralegals.” The court reduced Logistic’s local lead counsel’s hourly rate from $325 to $275 “in light of his [thirty-five] years of experience.” Other less experienced attorney’s hourly rates were reduced to $150-$130.

As to an out-of-state law firm of Logistic requesting fees, the court determined that “Puerto Rico must serve as the relevant community to determine fees, rather than the law firm or lawyers’ community in the United States, i.e. Seattle, because there are local lawyers more than able to handle the civil litigation at issue in this case.” The court reduced the hourly fees of the stateside attorneys from a top of $570 to $300 and associates from $260-$335 billed per hour to $150 and paralegals and contract attorneys to $75 an hour. Based on the record and without a finding of temerity, the court awarded Logistic $758,915 in fees and $101,047 in expenses.

AAA ICDR Panel rules that Johnson & Johnson International violated Law 75 and awards damages, fees, and costs to Puerto Rico distributor in excess of $1.1 million plus interest

The proceeding between Claimant Puerto Rico Hospital Supply Group, Inc. (“PRHS”) and Respondent Johnson & Johnson International (“J&JI”) Case No. 01-17-0007-4506 before a three-member panel of the International Center for Dispute Resolution of the American Arbitration Association (referred to as the “AAA arbitration”) presented interesting and substantial questions under Puerto Rico Law 75, including:

«Is a termination actionable for damages when the manufacturer’s purported intention is to terminate all of the distribution agreements except one and its actions are consistent with a complete refusal to deal?

«Do preexisting financial motivations and economic interests of the manufacturer suggest that the business reason it ostensibly gives for a termination is a pretext?

«When is pretext sufficient to overcome the manufacturer’s proffer of just cause for termination?

«Must contractual payment terms that underlie the termination decision be reasonable and adjust to market conditions in the territory at relevant times?

«Does an offer of a payment and performance bond to secure the payment of a debt under the distribution agreement qualify as a payment in cash or its equivalent?

Claimant PRHS is one of Puerto Rico’s oldest and largest distributors of medical devices and products. For decades after 1964, PRHS sold and distributed Johnson & Johnson (and Ethicon) branded sutures and medical devices used in patient-critical surgical procedures by hospitals and other medical providers throughout Puerto Rico. There were various written distribution agreements in effect between the parties: most of the agreements were exclusive, but one was non-exclusive. The non-exclusive agreement had a mandatory arbitration provision while the exclusive agreements did not. J&J’s products represented approximately 20% of PRHS’s total sales, including roughly 5% for the non-exclusive product lines. There was a history of prior federal litigation between the parties that resulted, among other things, in agreeing to 90-day payment terms for all the contracts.

For the past 12 years, Puerto Rico’s economy has slumped leading up to the eventual public bankruptcy. Private and public hospitals have not been immune from this economic downturn and remain exposed to the mass migration of thousands of Puerto Rican residents (many are patients) to the mainland, the closing of beds and aisles in hospitals, and as if that were not enough, to catastrophic damages and business interruptions to the general population caused by Hurricanes Irma and María in 2017.

In 2015, the liquidity of hospitals grew tighter aggravating delays in payments to their suppliers, including to PRHS. While the days sales outstanding (DSO’s) of PRHS’s invoices to hospitals increased to roughly 183 days on average (some public hospitals took over 300 days to pay), PRHS’s distribution contracts with J&JI all had 90-day payment terms. During 2016, PRHS started falling behind in its payments to J&JI but continued making partial payments of millions of dollars.

J&JI decided to make a preemptive move to judicially enforce the 90-day payment terms. In March 2017, J&JI sued PRHS in federal court in Puerto Rico. J&JI requested a declaration that it had just cause under Law 75 to terminate all the agreements between the parties for non-payment of invoices and have PRHS cease and desist from using any of J&J’s brands and trademarks for the sale and distribution of its products. J&JI requested the collection of monies from PRHS exceeding $4.5 million allegedly due for products sold and delivered under all the agreements. What is more, J&JI filed a motion for preliminary injunctive relief to attach PRHS’s bank accounts to secure the payment of the total alleged debt. PRHS opposed the request for equitable relief and moved to dismiss or stay the action in favor of arbitration. J&JI resisted arbitration.

The federal court denied J&JI’s request for equitable relief and granted in part PRHS’s motion to dismiss and stay the case in favor of arbitration concerning the non-exclusive contract. See Johnson & Johnson v. Puerto Rico Hospital Supply, 258 F. Supp. 3d 255 (D.P.R. 2017) (granting, in part, motion to dismiss) and 322 F.R.D. 439 (D.P.R. 2017) (denying J&JI’s motion for reconsideration). The court explained the stay reasoning essentially that an arbitration award could be dispositive of issues and claims in the federal action and there is a possibility of inconsistent determinations if the two proceedings could move forward simultaneously.

Meanwhile, J&JI sent a notice to PRHS in September 2017 unilaterally terminating all the exclusive agreements ostensibly for lack of payment but informing PRHS that it had decided not to terminate the non-exclusive agreement with the arbitration clause (as if that could have prevented PRHS from initiating the court-sanctioned arbitration). The termination of the exclusive contracts would become effective a day after Hurricane María made landfall over Puerto Rico. By the effective termination date, J&JI also took over the direct sale and distribution to customers of all the products previously sold and distributed by PRHS. In October 2017, J&JI informed PRHS that it was not, among other things, authorized to place any purchase orders for any products of J&J’s brands and demanded the return of all the inventory. In November 2017, PRHS complied and returned all its inventory of J&J’s products, including the products sold under the non-exclusive agreement, which J&JI later resold to customers.

PRHS filed a Demand for Arbitration at the AAA alleging a claim under Law 75 for termination without just cause of the non-exclusive agreement and requesting damages over $400,000 plus an award of fees and costs. PRHS also filed a separate action in federal court in Puerto Rico (Civ. No. 17-2281 (DRD)) under Law 75 for termination of the exclusive contracts allegedly worth over $10 million. The federal actions were not consolidated. J&JI responded in the AAA arbitration with a counterclaim for collection of monies which, as amended during the hearings, allegedly exceeded $540,000.

After extensive discovery, seven days of evidentiary hearings, and the lifting of an automatic stay resulting from the distributor’s intervening Chapter 11 bankruptcy petition, on May 2, 2019, the AAA Panel rendered a final reasoned and written award. In a 63-page majority 2-1 decision (joined by Chair José A. Fusté and Manuel San Juan, Esq.) with one panelist concurring and dissenting in part (Edgardo Cartagena, Esq.), the Panel determined that J&JI had terminated the non-exclusive agreement and it had done so without just cause in violation of Law 75. The Panel awarded PRHS five years of lost profits on the line, the cost of the returned inventory, AAA fees, the pro rata share of fees it paid for panel compensation, attorney’s and expert witness fees as the prevailing party under Law 75, and costs and interest at the annual rate of 6.25% for a sum exceeding $1.1 million. The Panel credited fully the testimony on damages of PRHS’s expert Carlos Baralt, CPA. PRHS did not claim a loss of goodwill from the termination of the non-exclusive line. The Panel also unanimously concluded that J&JI had failed to prove the existence of the debt or its amount and dismissed the counterclaim with prejudice.

Whether or not there was just cause for termination was a fact-intensive question and the Panel heard live witness testimony and received in evidence documents relevant to this issue. Having its ultimate burden of persuasion on the issue of just cause and needing to rebut a legal presumption of lack of just cause in P.R. Laws Ann. tit. 10, 278a-1(b)(1) from having sold the products previously handled by the distributor, J&JI argued that PRHS’s breaches of the 90-day payment term, without more, were just cause under Law 75.

First, there is no actionable termination claim under Law 75 unless the manufacturer terminates the contract, but detrimental acts that impair the contract are also actionable. Once the distributor proves a termination or impairment of the agreement, the burden shifts to the manufacturer to prove just cause. The Panel determined that, although the manufacturer may proclaim in writing not to have terminated the non-exclusive agreement, its subsequent actions and course of conduct proved its intent to refuse to deal and effectuate a termination of all the contracts. The Panel found sufficient evidence of a termination of all the contracts from conduct by J&JI prohibiting PRHS from honoring any purchase orders from its customers for the sale of any products of J&J’s brands, from prohibiting the use of any trademarks for marketing purposes, from ordering the return of all products on inventory, and later selling the inventory directly to the distributor’s former customers. The Panel held that J&JI’s “intention in 2017 was simply to terminate all commercial relations with PRHS and move from an indirect to a direct sales strategy, completely cutting out PRHS from the equation.” Award at 31.

Second, the Panel observed that, under Puerto Rico law, lack of timely or complete payments is not just cause without considering the terms of the agreement, whether the payment terms are essential obligations or not, how material are the breaches, and the conduct of the parties. The Panel gave weight to J&JI’s inconsistent conduct alleging the termination of the exclusive agreements but not the non-exclusive agreement when the basis of the distributor’s alleged breaches of contract was identical. The evidence established that the 90-day payment term in the non-exclusive agreement was not an essential obligation because the supplier alleged to have kept the non-exclusive contract in full force and effect despite the defaults in payment.

Regardless, the Panel found that J&JI’s reasons proffered for the termination were pretextual. Pretext can rebut a showing of just cause under Law 75. Before PRHS fell behind in its payments, J&JI’s internal marketing plans and strategies had devised a plan to implement a direct distribution model to bypass its Puerto Rico distributor. The Panel also gave weight to evidence derived from J&JI’s audited financial statements filed as public records proving that its Puerto Rico division had operational losses at relevant times after its parent company divested itself of another franchise causing the loss of millions of dollars in sales. The Panel had sufficient evidence from which to infer that J&JI had a motive to appropriate for itself the market and clientele created by PRHS which gave way to a convenient excuse to terminate the agreements for lack of payment.

It was also highly probative that J&JI’s manager in Puerto Rico took credit in her job evaluation for implementing, after PRHS’s termination, a “PRHS legal strategy” to move the organization from an indirect model to a direct model for the Ethicon franchise. “[The Panel] finds that the need to increase revenue, and not PRHS’s payment delays, was the driving force” behind J&JI’s move to conveniently cut PRHS out of the market. (Award at 39).

The Panel also decided novel issues of Puerto Rico law which should be relevant to any manufacturer or supplier considering the termination of a dealer’s contract for lack of payment in the context of adverse economic or market conditions. Section 278a-1(c) of Law 75 provides that any “rules of conduct” or distribution quotas or goals in a dealer’s contract must adjust to the realities of the Puerto Rico market at the relevant moment of the dealer’s non-performance, or else, are unenforceable.

From plain language, context, and statutory history, the Panel concluded that the prohibition in Section 278a-1(c) was not limited to performance standards set in a distribution contract, but also applied to payment terms. Because J&JI failed to present any evidence that the 90-day payment terms- as standards of conduct- adjusted to the realities of the relevant health care market in Puerto Rico during 2016-2017, the Panel credited the testimony of PRHS’s experts Julio Galíndez, CPA and Gustavo Vélez that the payment terms were unreasonable, and therefore, null and void under Law 75.

In the end, critical to the Panel’s analysis of just cause was sufficient evidence that, a few weeks before the termination notice, PRHS made an offer to J&JI to guarantee payment in full of the total amount of the debt outstanding on all the agreements by posting a payment and performance bond. An internal J&JI’s memorandum prepared contemporaneously with the offer corroborated this evidence. J&JI rejected the offer out of hand without any serious consideration or explanation to PRHS. The Panel found that the payment and performance bond would have operated like cash in hand to J&JI because under Puerto Rico law a surety steps in to pay the creditor for a default in payment by the debtor. The Panel concluded that a payment and performance bond would have obviated any need to terminate the distributor. Accordingly, the Panel held that the rejection of the bond proposal was “unreasonable and ill-considered” (Award at 46) and “adds to the Panel’s suspicions of pretextual motivations.” (Award at 49). The dissenting panelist was of the view that the termination notice, without more, proved no termination of the non-exclusive agreement but concurred with the majority’s dismissal of J&JI’s counterclaim.

On this record, the Award made the distributor whole for the full amount requested of compensatory damages for termination of the non-exclusive agreement, fees, interest, and costs, and the manufacturer took nothing on its counterclaim. The final award is subject to judicial enforcement.

The author is lead counsel for the Puerto Rico distributor in the arbitration and related federal litigation. Heriberto Burgos, Mariano Mier, and Mercedes Rodriguez are part of CAB's litigation team.