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 The written agreement expressly captured the essence of those representations and included an integration clause that superseded prior representations making the written agreement the only agreement between the parties.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.

“Muddied waters” or not, Law 75 claims for termination of exclusive distributorship and tort damages are arbitrable

It is unremarkable that the Federal Arbitration Act enforces written arbitration agreements involving Law 75 claims. Unless the movant (the dealer) seeks to invoke the district court’s limited power to issue a Teradyne injunction in aid of arbitration, claims for injunctive relief fall in the hands of the arbitrator. Next Step Medical Co. v. Johnson & Johnson International, No. 09-2077 (1st Cir. Aug. 30, 2010) is one of those cases. What is peculiar about the case is the appeal from the District Court’s judgment dismissing with prejudice a tort claim for emotional distress as not viable in a contract action, despite a Magistrate’s prior recommendation that the entire action was arbitrable. Despite the First Circuit's statement that the district judge “muddied the waters” by dismissing the arbitrable claims with prejudice, the appellate court sanitized the Judgment and concluded that the dismissal with prejudice meant the claims could not be brought in court; but rather, the claims survived on the merits for arbitration. After a removal to federal court, a still born request for injunctive relief, the lost appeal, years of litigation, the dealer was forced to arbitrate as required by the clear and broad arbitration agreement.

Swinging for the fences but striking out: requesting a preliminary injunction under Law 75 and not getting it may taint the outcome on the merits

I’ve written before that the traditional requirements for preliminary injunctive relief under FRCP 65 are mandatory and preempt Law 75 if read to allow the granting of a preliminary injunction without a showing of irreparable harm. It’s not an Erie issue, but a Hanna v. Plummer issue, which holds that the federal civil rules preempt state substantive law when in conflict.

It does not matter, ruled a U.S. Magistrate Judge in Penn Shoppe v. Montblanc North America, No. 08-1939(JAG/BJM)(April 1, 2009), for the supplier in that case met its burden of showing just cause for termination. In that case the line represented over 40% of the retailer’s business. After an evidentiary hearing, the Magistrate found that the retailer’s consistently late payments, purchases over the credit limit and bounced or postdated checks- practices that were not condoned by the supplier in the regular course of dealings-did not alter the established payment terms. In sum, the Magistrate concluded that the movant had not established a likelihood of success on the merits for a preliminary injunction under Law 75.

On July 31st, the court adopted the Magistrate's Report and Recommendation in its entirety.

About my comment that a denial of a preliminary injunction may taint the final outcome, my point is that parties should evaluate carefully the likelihood of success on the merits of their claims before moving for interim relief (attachments or injunctions). While it is true that a court's findings at the preliminary injunction stage are not binding on the merits, a court's conclusion on whether the requirement of likelihood of success has been met, unless reversed on appeal, may influence that court's disposition of the case especially in the context of a motion for summary judgment or after a bench trial.