The First Circuit applies Iqbal’s plausibility standard to affirm the dismissal of a Law 21 claim and compel arbitration of claims for breach of contract and implied duty of good faith and fair dealing.

In Ashcroft v. Iqbal, 129 S. Ct. 1937 (2009) the Court heightened pleading requirements holding that “threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice.”

In IOM Corporation v. Brown Forman, slip op., No. 09-1672 (1st Cir. Dec. 2, 2010), the opportunity presented itself for the First Circuit to review an order granting a motion to dismiss under FRCP 12(b)(6) a claim brought under Law 21. A detailed recital of the facts is appropriate as this noteworthy case presents a host of issues that come up regularly in distribution cases in Puerto Rico involving allegations of exclusivity, parole evidence, and integration clauses.

There, the broker Caribbean alleged that it had entered into oral agreements with Brown Forman’s predecessor to promote Finlandia vodka and Jack Daniels whisky in Puerto Rico. Subsequently, the parties entered into promotion agreements on a commission basis. The promotion agreements had integration and completeness clauses which, in effect, superseded the prior oral agreement with Brown Forman’s predecessor.

What prompted the lawsuit was that Brown Forman decided to restructure its operations in Puerto Rico and offered Caribbean to serve as its exclusive broker, but this arrangement would have permitted Brown Forman to open a sales office in Puerto Rico. Negotiations failed and Caribbean brought suit in local court since removed to federal court. Caribbean asserted claims for breach of an alleged oral exclusive contract, wrongful termination under Law 21, breach of contract and breach of the duty of good faith and fair dealing. After holding a hearing on Caribbean’s application for a preliminary injunction and denying injunctive relief, the federal court (Besosa, J.) dismissed the Law 21 claim and ordered arbitration of the remaining claims.

The First Circuit agreed with the District Court that the Law 21 claim was not plausible on the facts alleged. The court, citing Puerto Rico Supreme Court precedent, noted that the elements of a Law 21 claim require obligations to promote and expand the market in a territory for the principal’s products in exchange for a commission, as well as an appointment of exclusivity.

First, the court concluded that the promotion agreements met none of the elements except the payment of commissions. Caribbean attempted to vary the clear terms of the agreements with extraneous evidence. Though the court recognized that the parole evidence rule had been repealed, in dicta, it suggested that the legal effect would be the same under Article 1233 of the Civil Code whose mandates requires observing the literal terms of a clear and unambiguous agreement. Even considering extrinsic evidence, the court concluded that Caribbean did not have authority to close sales orders on Brown Forman’s behalf, an essential element of a Law 21 claim, and did not allege sufficient facts to prove that the relationship was exclusive.

On the exclusivity element, the court held that it is “generally apparent either from the contract or from the arrangements agreed upon by the parties.” Where Iqbal comes in, is that the court concluded that the allegations of exclusivity were conclusory. There were no facts pleaded as to the scope of exclusivity and no allegation was made that Brown Forman had made any “assurances” that would support the contention that “no other sales representatives were allowed to sell the products in Puerto Rico.” The integration and completeness clauses were material to defeat the argument that extrinsic evidence existed that contradicted the plain terms of the promotion agreements (which were not exclusive on their face). On these facts the court affirmed the dismissal of the Law 21 termination claim of a purportedly oral exclusive agreement.

Turning to the arbitration issue, the court rejected the argument that the breach of contract claim arose from a non-arbitrable oral agreement. With the broad "arising under and related to" arbitration clause in the promotion agreements, all related claims of breach of contract and bad faith were arbitrable under the AAA in Louisville, Kentucky. The court held that all claims arose from the termination of the promotion agreements which have valid and enforceable arbitration clauses. As to the choice of forum, the court found that Caribbean had waived the argument that it was unenforceable under Law 21 for lack of a developed argumentation. As a matter of law, the court enforced the arbitration agreements and dismissed the claims.

Last but not least important, the court affirmed an award of attorney’s fees of $23,456 for temerity against Caribbean. It was significant to affirm the award under plain error review since Caribbean failed to object to the itemized and verified statement of fees. The court affirmed the judgment in its entirety.

Federal court denies dealer’s motion for a preliminary injunction under Law 75 after finding an adequate remedy at law and no irreparable harm

As of late, dealers have not fared well in federal court when requesting preliminary injunctions under Law 75. It is unusual, however, for a court to deny preliminary injunctive relief after concluding that the dealer showed a likelihood of success on the merits of its claims and the public interest favors the injunction. Beatty Caribbean v. Nova Chemicals, No. 08-2259, 2009 WL 2151303 (ADC-CVR)(Velez-Rive, U.S. Mag. Judge) (D.P.R. July 16, 2009) is such a case.

There, the agent complained that the principal impaired verbal agreements for the sale and distribution of chemical products by unilaterally reducing the commission percentage from 5% to 3% in violation of Laws 75 or 21. The principal counterclaimed that an asset purchase transaction did not change a previously existing sales representation agreement, and that the agent was a non-exclusive representative who lacked an actionable claim under Laws 75 and 21. After consenting to proceed with the Magistrate and holding a hearing, the court denied the request for a preliminary injunction.

While the court found that, prima facie, the principal had impaired a protected relationship by reducing the payment of commissions without just cause, the agent had failed to satisfy two of the traditional prerequisites for injunctive relief, namely, balancing of the equities and irreparable harm. The court cited, and applied, the traditional prerequisites for injunctive relief under Federal Rule 65, noting that the standards are “tempered” considering the public policy objectives behind Law 75. The court determined that it would not overlook the issue of irreparable harm, though cited case law suggesting that a plaintiff need not show irreparable harm under Law 75.

On the issue of irreparable harm, the agent testified that the reduction in commissions caused a 40% reduction in revenues, which the court determined was legally insufficient for finding irreparable harm. The court held that financial injury alone does not constitute irreparable harm and that damages are recoverable at law. The balance of the equities favored the principal, the court said, because an injunction would alter existing relationships with other dealers.

My editorial comment. While the principal has a good reason to rejoice for the outcome in that case, the order denying the preliminary injunction may be vulnerable to attack by interlocutory appeal. The abuse of discretion standard will not help affirm the opinion because the district court found that prima facie the agent was a dealer or sales representative and there was no just cause. So, two of the most important requirements were met. The court’s conclusion that irreparable harm is mandatory for a federal court to issue a preliminary injunction under FRCP 65 is correct and sound. Although not discussed, under Hanna v. Plummer, the federal procedural rules requiring a showing of irreparable harm preempt contrary state substantive law, but Law 75 does not prohibit considering the traditional factors for preliminary injunctive relief so the court did the right thing to evaluate that factor. Where I think there might be an issue is with the court’s finding that financial hardship and a 40% drop in revenues are insufficient for a showing of irreparable harm. So, at the end of the day, the standard on appeal to review the legal issue of irreparable harm may be plenary and who knows what can happen.