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May a foreign supplier establish its own entity to import and distribute its products in your jurisdiction?
A foreign supplier can establish its own entity in Puerto Rico to import and distribute its products as long as it has not previously granted rights to local distributors that are inconsistent with the establishment of the supplier’s own entity.
For example, the Puerto Rico Dealers’ Contracts Act (Law No. 75 of 24 June 1964), 10 PR Laws Ann. sections 278 et seq (Law 75) regulates the relationship between a supplier and its distributor, and establishes a rebuttable presumption of impairment in cases when the supplier establishes facilities in Puerto Rico for the direct distribution of merchandise, the distribution of which was previously granted to the distributor. This is particularly applicable to situations where the distributor has exclusive distribution rights.
May a foreign supplier be a partial owner with a local company of the importer of its products?
Law 75 does not prevent or limit a foreign supplier from acquiring partial ownership in a local company that is the importer of its products. Depending on the amount of equity and control acquired by the supplier in the local company, however, practical and legal issues regarding governance of the entity, its operations and the distribution relationship between the local company and the supplier may have to be considered in light of Law 75.
What types of business entities are best suited for an importer owned by a foreign supplier? How are they formed? What laws govern them?
Various forms of business entities are available, but the forms most used are corporations and limited liability companies (LLCs).
Puerto Rican corporations and LLCs are formed by filing articles of incorporation or organisation with the Department of State. The entity must maintain at all times a local office and a resident agent for service of process.
Foreign corporations and foreign LLCs may also be registered by filing an authorisation to do business with the Department of State.
Registrations are made online and they require a US$150 government filing fee for corporations and US$250 for LLCs. To maintain their registrations, corporations must file corporate annual reports along with a US$150 filing fee. These reports must include a balance sheet. LLCs only have to file a US$150 annual filing fee; no report is required. These fees change from time to time.
Corporations and LLCs are governed by the Puerto Rico General Corporations Act of 2009 (Act No. 164 of 16 December 2009), as amended, which has been drafted in its majority to mirror Delaware’s statutes.
Does your jurisdiction restrict foreign businesses from operating in the jurisdiction, or limit foreign investment in or ownership of domestic business entities?
There are no specific restrictions as to foreign investment and foreign ownership of domestic entities. Generally, foreign businesses are subject to the same requirements as Puerto Rican entities. Since federal laws extend to Puerto Rico, federal controls on foreign investments are applicable. In cases involving foreign (non-US) individuals doing business and residing in Puerto Rico, immigration laws will apply.
May the foreign supplier own an equity interest in the local entity that distributes its products?
See question 2.
What are the tax considerations for foreign suppliers and for the formation of an importer owned by a foreign supplier? What taxes are applicable to foreign businesses and individuals that operate in your jurisdiction or own interests in local businesses?
Companies organised in Puerto Rico are subject to Puerto Rican income tax on their worldwide income. Foreign companies engaged in trade or business in Puerto Rico are taxable only on the income generated from sources within Puerto Rico and certain types of income effectively connected with operations in Puerto Rico. Partnerships and limited liability companies electing to be taxed as partnerships are not subject to tax, but net income is assigned to the partner or member who is responsible for payment of the applicable income taxes. Puerto Rican companies that are subject to taxation outside Puerto Rico may claim a tax credit for income taxes paid to a foreign jurisdiction. Similarly, foreign companies subject to tax in Puerto Rico may claim a credit for the taxes paid to Puerto Rico depending of the law of the jurisdiction of their organisation.
The corporate income tax rate ranges from 20 to 39 per cent of the net income of the entity. The alternative minimum tax (AMT) is intended to prevent taxpayers from reducing their income tax liability by benefiting from substantial tax preferences. The AMT is the amount by which the tentative alternative minimum taxable net income for the taxable year exceeds the regular tax for the taxable year.
Generally, dividends paid by Puerto Rican companies, or by certain foreign companies engaged in trade or business in Puerto Rico, to residents and non-resident persons are subject to a 15 per cent withholding tax. A dividend received deduction of 85 per cent is allowed on dividends received by a company engaged in trade or business in Puerto Rico from a domestic (Puerto Rican) corporation (100 per cent in the case of a controlled Puerto Rican company).
Net long-term capital gains upon the exchange or sale of investment and business assets held for more than one year by a company are subject to a 20 per cent tax (15 per cent for individuals). Inventory is not considered a capital asset. Capital losses are allowed up to 80 per cent of the net capital gain generated in the taxable year. Unused capital losses can be carried forward until exhausted, subject to the 80 per cent limitation.
The determination of net income is made under generally accepted US accounting principles. The net income of the company is computed to reflect the tax treatment of items of income and deductions. In general, financial statements audited by a certified public accountant authorised to practise in Puerto Rico must be attached to the company’s income tax return if the volume of business of the company reaches US$3 million during the taxable year. Certain supplementary information must also be included.
Puerto Rican source income derived by foreign companies not engaged in trade or business in Puerto Rico is subject to a 29 per cent withholding tax. This tax also applies to interest paid from sources in Puerto Rico to a related foreign company not engaged in business in Puerto Rico (interest paid to unrelated persons is not subject to withholding taxes).
Sales and use tax
Puerto Rico imposes a sales and use tax (SUT) upon the introduction, sale, consumption or use of a taxable item (eg, tangible personal property, taxable services, etc). The SUT rates are 10.5 per cent (4 per cent SUT applies on certain services) for the state and 1 per cent for the municipalities.
The SUT applies to services rendered by a non-resident person or company to a company engaged in trade or business as well as to management fees and inter-company transactions within a controlled group. A company cannot commence operations in Puerto Rico unless it is registered as a merchant for SUT purposes. The declaration and payment of the SUT must be made online through the portal established by the tax agency.
Other important taxes
Municipal licence tax (gross volume of business tax) is 1.5 per cent for financial businesses and 0.5 per cent for others and must be declared and paid to each municipality in which the business maintains a commercial location.
Property taxes range from 6.08 to 8.83 per cent and real property tax ranges from 8.08 to 10.83 per cent depending on the municipality in which the property is located. These rates are for fiscal year 2016-2017 (rates for fiscal year 2017-2018 were not available at the time of writing).
Local distributors and commercial agents
What distribution structures are available to a supplier?
The distribution structures available to a supplier doing business in Puerto Rico include direct distribution by the supplier or an affiliate, independent distribution, sales representatives, franchising, brokers, private labelling, trademark licensing and joint ventures. The choice of the structure will depend on the nature of the supplier’s business and the manner in which it wishes to develop, operate and control its business in the Puerto Rican market. In addition, the determination of which law will apply to the distribution structure may influence which structure is used. For example, distribution and franchise relationships may be covered by Law 75, while sales representatives and maybe even some brokers and agents could be covered by the Sales Representative Act (Law No. 21 of 5 December 1990), 10 PR Laws Ann. sections 279 et seq (Law 21). Law 21 protects sales representatives in a manner similar to the protection extended to distributors under Law 75.
Both Law 75 and Law 21 are highly protectionist statutes that therefore require careful analysis, on a case-by-case basis, prior to setting up distributor or sales representative relationships.
There is no specific statute in Puerto Rico governing or regulating the creation of, operation or investment in franchises as such, and those aspects of doing business with franchises would generally be subject to US laws and covered by the Federal Trade Commission rule, because Puerto Rico is part of the United States. The relationship between a franchisor and its franchisees, of course, has many of the characteristics of a plain, non-franchise labelled distribution relationship and as such may be covered under Law 75. Moreover, Law 75 specifically lists distribution by franchise as covered by the statute.
Other distribution structures, such as those with brokers, independent label sellers, joint ventures with the distributor or sales representatives and contracts for logistics and warehousing services may or may not be covered by the two main statutes depending on the nature and specifics of the relationship, and have to be analysed case by case.
Legislation and regulators
What laws and government agencies regulate the relationship between a supplier and its distributor, agent or other representative? Are there industry self-regulatory constraints or other restrictions that may govern the distribution relationship?
Law 75 regulates the relationship between a supplier and its distributor that is actively promoting the supplier’s product in Puerto Rico. Law 21 regulates the relationship between the supplier’s agent acting as a sales representative and the supplier. Both of these laws regulate relationships within the chain of sale or distribution. Any matter not specifically covered by the specialised statutes will be supplemented by the Puerto Rico Commerce Code (10 LPRA sections 1001 et seq) and the Puerto Rico Civil Code (31 LPRA sections 1 et seq).
There is no government agency entrusted with particularly enforcing these two statutes. Judicial enforcement is the most common method of invoking the rights afforded by these two specialised laws. Arbitration is another common method for resolution of disputes arising under the two statutes or under more general principles of law covering the distribution or sales representation relationship.
Both distributors and sales representatives are bound by regulations under the Department of Consumer Affairs (DACO), which regulates truth in advertising, promotional campaigns and contests and related matters. While this agency and its regulations may not typically govern the formation, existence or termination of the relationship, they do frequently affect how distribution and sales representation is done and therefore ‘regulate the relationship’ to a certain extent.
There are no formal self-regulatory constraints that would officially affect the distribution or sales representation relationship.
Are there any restrictions on a supplier’s right to terminate a distribution relationship without cause if permitted by contract? Is any specific cause required to terminate a distribution relationship? Do the answers differ for a decision not to renew the distribution relationship when the contract term expires?
Even if allowed by contract, Law 75 and Law 21 prohibit either the termination of a distribution relationship during its contracted term or the refusal to renew it at expiry, unless there is just cause or the distributor or sales agent is compensated for the termination or refusal to renew, assuming it is entitled to compensation.
Under either Law 75 or Law 21, there is no specific list of acts or events that constitute statutory just cause allowing termination of a distribution or sales representative contract. Both laws, however, define the concept in general form, as follows: (i) the breach by the distributor or sales representative of its essential obligations under the distribution or sales representation agreement; or (ii) any act or omission of the distributor or sales representative that adversely and substantially affects the interests of the principal or grantor (supplier) in the development of the market or the sale of merchandise or services.
Case law has identified examples of situations that will more likely than not meet the general just cause criteria of the statute, such as the distributor’s failure to pay for the merchandise purchased from the supplier, the distributor’s own failure to renew and the supplier’s withdrawal from the market under certain circumstances. However, identifying in advance what may be considered just cause by a court, jury or arbitrator remains a challenge that will largely depend on the facts of each situation.
In addition, these statutes protect the distributor or sales agent by subjecting the enforcement of typical just cause contractual provisions to a higher standard. For example, under Law 75, the breach of clauses preventing or restricting changes in the capital structure, or in the managerial control of the business, will not automatically constitute just cause justifying termination, unless the supplier shows that such breach may affect, or has truly and effectively affected, the interests of the supplier in the development of the market, distribution of the merchandise or rendering of services in an adverse or substantial manner. Other restrictions exist.
Suppliers should also keep in mind that Law 75 and Law 21 both protect not only against termination without just cause but also against what the laws describe as impairment of the relationship. A classic example of impairment would be sales by a supplier to a distributor, contrary to an agreement of exclusivity with another, who would then argue its rights are being impaired by the sales to the third party.
Is any mandatory compensation or indemnity required to be paid in the event of a termination without cause or otherwise?
Law 75 provides general guidance for the compensation of damages in the event of termination without cause. Law 21 has a similar set of guidelines for compensation of sales representation that is terminated without just cause, but it also has an alternative compensation section that allows, at the request of the sales representative, an alternate compensation calculation: an amount that shall not be greater than 5 per cent of the total sales volume for the years of representation. The court has the discretion of modifying the compensation to ensure it does not constitute an unfair enrichment at the expense of the supplier. In establishing the amount of the alternate compensation, the court shall mainly take into account the compensation received by the sales representative from the supplier and the number of years and sales volume that the sales representative produced during said relationship.
The final determination of damages and entitlement to compensation, however, will ultimately have to be reached by a judge, jury or arbitrator after pondering whether actual damages have been suffered by the distributor or sales representative. The distributor or sales representative will have the burden of proving its damages.
Under Law 75, a court may allow attorneys’ fees and a reasonable reimbursement of expert fees to the prevailing party. Law 21, however, has no such provision.
Suppliers should also be aware that, in litigation under both statutes, a distributor or sales representative has a right to request, in addition to damages, a provisional remedy to preserve the status quo of the relationship pending resolution of the litigation. The request is similar to one for injunctive relief and the courts tend to apply similar tests, although the dealer is typically not required to meet the high burden of an ordinary injunction. The court or other decision maker, however, needs to take into consideration the interests of both parties in ruling on the injunction.
Transfer of rights or ownership
Will your jurisdiction enforce a distribution contract provision prohibiting the transfer of the distribution rights to the supplier’s products, all or part of the ownership of the distributor or agent, or the distributor or agent’s business to a third party?
See question 9. The violation or non-performance by a distributor of a provision in a contract preventing or restricting the transfer of the distribution rights, all or part of the ownership of the distributor or agent or the distributor’s or agent’s business to a third party will not be held valid as just cause for termination of a distribution agreement unless the supplier shows that such non-performance may affect or has truly and effectively affected the interest of the supplier in a substantial manner in the development of the market, distribution of the merchandise or rendering of the service. The supplier bears the burden of proof.
Regulation of the distribution relationship
Are there limitations on the extent to which your jurisdiction will enforce confidentiality provisions in distribution agreements?
Confidentiality provisions in distribution agreements will be enforced in Puerto Rico under the general contracts law in the Civil Code. They will be considered valid unless they are contrary to law, public order or morals. To date, there is no law that has prohibited or limited these confidentiality clauses in distribution agreements.
Are restrictions on the distribution of competing products in distribution agreements enforceable, either during the term of the relationship or afterwards?
Clauses that restrict the distribution of competing products during the term of the relationship are enforceable in distribution agreements. After the relationship concludes, such competition restrictions will be enforceable if the court determines that they are reasonably necessary to protect the legitimate interests of the supplier. Such determination will be made on a case-by-case basis. Courts have found that a non-competition clause that survived the termination or expiry of a franchise agreement for two years was enforceable (Franquicias Martín’s BBQ, Inc v Luis García de Gracia, 178 DPR 978 ).
May a supplier control the prices at which its distribution partner resells its products? If not, how are these restrictions enforced?
Federal antitrust law applies in Puerto Rico. Puerto Rico has its own competition statutes that generally mirror those in the United States both in language and interpretation.
In general terms, and under existing US Supreme Court law, a supplier should be able to impose the vertical restraints of maximum resale price maintenance (RPM) and minimum RPM, although the latter continues to be the subject of diverse positions among state enforcement authorities in the continental United States.
Federal and local enforcement of, or opinion on, the prohibition of either of the forms of RPM is not pervasive in Puerto Rico, unless part of a nationwide US effort that is of high public profile. Therefore, in very general terms, the larger the companies and the more widespread their reach around the world, the higher the possibility that institutional or governmental involvement may occur to scrutinise the pricing structure or mechanisms of the parties.
May a supplier influence resale prices in other ways, such as suggesting resale prices, establishing a minimum advertised price policy, announcing it will not deal with customers who do not follow its pricing policy, or otherwise?
See question 14. If a supplier wishes to implement the use of a minimum advertised price policy, it is preferable that the policy be in place beforehand so that if the dealer is not in agreement, the supplier may determine not to deal with the dealer or negotiate the matter. Once the policy is agreed with the dealer, the situation may be more difficult to navigate. Also, it is the view of many that if a minimum RPM is to be established, it should be the supplier doing so as opposed to the distributor.
The use of other mechanisms of vertical restraint that are not so heavily scrutinised may also achieve the intended pro-competitive purposes with lesser legal exposure risk.
May a distribution contract specify that the supplier’s price to the distributor will be no higher than its lowest price to other customers?
See questions 14 and 15. A distribution contract may specify that the price to a distributor will be equal to those of other distributors, but such a provision should also be included and complied with in contracts with the other distributors, to avoid potential price discrimination exposure.
Are there restrictions on a seller’s ability to charge different prices to different customers, based on location, type of customer, quantities purchased, or otherwise?
See questions 14 to 16. This question seems to contemplate sales at different distribution levels. In general, prices should be the same at the same level, but vertical price restraints are permissible on a case-by-case basis, as much depends on the situation of each circumstance. Volume discounts, for example, are common, but they should be made available to all customers on the same level of distribution, unless other factors justify a difference (eg, additional services rendered by one customer versus the others).
Geographic and customer restrictions
May a supplier restrict the geographic areas or categories of customers to which its distribution partner resells? Are exclusive territories permitted? May a supplier reserve certain customers to itself? If not, how are the limitations on such conduct enforced? Is there a distinction between active sales efforts and passive sales that are not actively solicited, and how are those terms defined?
See questions 14 to 17. All the vertical restrictions mentioned in the question are generally allowed and ideally should be specified in writing at the time of contracting.
Exclusive territories are permitted but a supplier may just as well restrict the geographic areas or categories to which its distribution partner resells, although in smaller countries or markets enforcement of geographic limits tends to be difficult. The supplier, however, also has the contractual ability to limit the specific market sectors or outlet location areas where the distributor may sell its products. The supplier may also limit within such authorised locations the categories of products to be sold or even the specific products within those categories.
A supplier may reserve certain customers to itself, but it is recommended that the distribution agreement specifically identify such reserved clients and specify the right to modify the list of reserved clients. A supplier may also, in the case of non-exclusive contracts, reserve the right to sell the products in the territory along with the distributor.
Unless specified by contract, we know of no statutory restrictions related to active as opposed to passive sales efforts.
May a supplier restrict or prohibit e-commerce sales by its distribution partners?
A supplier may prohibit or restrict e-commerce sales by a distributor either within or outside the assigned territory. The parties may also agree on reporting obligations and the payment of fees or penalties for breach of the restrictions or prohibitions. These restrictions, prohibitions, fees and penalties should be specified in the contract as an essential obligation for a better likelihood of enforcement.
Restrictions on third parties to which the distributor sells are more difficult to enforce, however, usually due to lack of privity. A supplier may attempt to impose such restrictions by demanding that the distributor include them in its contractual provisions with the third-party intermediaries.
Refusal to deal
Under what circumstances may a supplier refuse to deal with particular customers? May a supplier restrict its distributor’s ability to deal with particular customers?
A supplier can adopt its own sales policy in Puerto Rico and, as such, deal only with the customers it chooses. A supplier may also, as discussed above, contractually restrict to some extent a distributor’s right to deal with certain customers. There are of course other laws beyond the scope of this chapter that could prohibit a seller from discriminating against customers for reasons such as age, gender and national origin, for example. Other laws prohibit sales of certain products to sectors of the population (such as minors) owing to the nature of the products.
Under which circumstances might a distribution or agency agreement be deemed a reportable transaction under merger control rules and require clearance by the competition authority? What standards would be used to evaluate such a transaction?
A distribution or agency agreement may be deemed a reportable transaction under merger control rules if its effect is to substantially reduce competition or create a monopoly. The standards used by the Puerto Rican courts to evaluate such a transaction include the following:
- proof that the company (unilaterally or in combination with others) had a specific intent to monopolise the market by controlling prices or lessening competition;
- anticompetitive or predatory conduct was carried out to fulfil such intent; or
- that there exists the probability that such intent be successful.
Do your jurisdiction’s antitrust or competition laws constrain the relationship between suppliers and their distribution partners in any other ways? How are any such laws enforced and by which agencies? Can private parties bring actions under antitrust or competition laws? What remedies are available?
Distribution relationships in Puerto Rico are governed by US antitrust laws. Some of these laws have counterpart local statutes, such as the Puerto Rico Antitrust Act 10 PR Laws Ann. sections 257 et seq and the regulations promulgated by DACO that relate to unfair or deceptive practices. The Puerto Rico Department of Justice, through its Office of Monopolistic Affairs, is in charge of enforcing local antitrust policies.
These laws and agencies may affect the distribution relationship depending on the circumstances. Price discrimination issues, for example, would be covered by the Robinson Patman Act.
Private parties may bring actions under the Puerto Rico Antitrust Act. A plaintiff may recover three times the amount of damage in addition to costs and attorneys’ fees. Actions must be filed within four years of the occurrence of the cause of action.
An injunction may also be filed to prevent losses or damages to the business or property.
Are there ways in which a distributor or agent can prevent parallel or ‘grey market’ imports into its territory of the supplier’s products?
Generally, distributors or agents may not be able to detain shipments of diverted ‘grey market’ products if they are genuine, non-counterfeit goods. A supplier, by itself or with the assistance of the distributor, may be able to keep track of diverted products that are shipped into Puerto Rico and then attempt to stop the product at its source, a task not often easily accomplished.
The supplier and distributor should clarify in their contracts their respective obligations as to both incoming and outgoing diverted products and should request legal advice on how to achieve the best possible result in that endeavour and to define their respective contractual obligations towards each other in case of situations with parallel or diverted products.
What restrictions exist on the ability of a supplier or distributor to advertise and market the products it sells? May a supplier pass all or part of its cost of advertising on to its distribution partners or share in its cost of advertising?
Advertisement restrictions are imposed by DACO. This agency regulates and inspects periodically on the form of the advertisement and the offer of products to remain vigilant to deceptive and false advertising.
There are no restrictions on a supplier passing on all or part of its cost of advertising on to its distribution partners or sharing its cost of advertising. Actually, a distributor’s share in the cost of advertising increases the opportunity that Law 75 will apply to its relationship with the supplier.
How may a supplier safeguard its intellectual property from infringement by its distribution partners and by third parties? Are technology-transfer agreements common?
Intellectual property protection in Puerto Rico is similar to that in the United States. Protection exists under both local and federal statutes.
In terms of trademarks and service marks, the basic manner of establishing rights to a mark is the actual use of the mark. Registration of the mark is not required to establish ownership, but it is recommended because it establishes proof of ownership. If the mark will be used in Puerto Rico as well as other places in the United States, registration at the local and federal level is recommended.
In addition to the benefit of protection under US copyright laws, Puerto Rico also has copyright legislation protecting moral rights of the author of a work. The law establishes that registration is not necessary to protect an author’s moral rights over its work but, as with trademarks, registration constitutes prima facie evidence of the validity of the moral rights of the author.
Trade secrets are also protected under local law and their owner may seek damages for violation of any dissemination of such secrets. Patents are applied for before the US Patent Office and are protected by US patent laws.
The supplier may file an infringement claim before the courts to enforce its rights to its intellectual property.
Technology-transfer agreements are not as abundant as other types of distribution, assignment or licensing agreements but certainly take place within the Puerto Rican market, with increasing frequency.
What consumer protection laws are relevant to a supplier or distributor?
Consumers are protected by regulations promulgated by DACO. The Regulation against Deceptive Practices and Advertisements protects consumers against practices and advertisements that create a false or misleading appearance on goods and services offered to consumers. The regulation also establishes consumer rights in connection with ‘rain checks’, rebates, warranties and requests for personal information. Suppliers and distributors that wish to conduct sweepstakes or other promotional contests or campaigns as a way of endorsing or supporting the sale of their products will be subject to the Regulation on Sweepstakes, which requires specific information to be disclosed to the consumer and procedures for the execution of the sweepstake.
Briefly describe any legal requirements regarding recalls of distributed products. May the distribution agreement delineate which party is responsible for carrying out and absorbing the cost of a recall?
There is no specific local legislation for the recall of products but consumer rights will be protected under the general DACO regulations and policies. The distribution agreement may delineate the party responsible for carrying out and absorbing the cost of the recall.
To what extent may a supplier limit the warranties it provides to its distribution partners and to what extent can both limit the warranties provided to their downstream customers?
The extent of the limitation will depend on the nature of the product sold. For example, under the Motor Vehicle Warranty Act, PR Laws Ann. Title 10, sections 2051 to 2065 and DACO’s Motor Vehicle Warranty Regulations, every manufacturer must extend the factory warranty to every new motor vehicle registered in Puerto Rico, regardless of where and from whom the consumer acquired it. The warranty to be extended and honoured in Puerto Rico must not be inferior in its terms and conditions to the warranty extended by the maker or manufacturer in benefit of the consumer on the US mainland or in the country in which the motor vehicle was manufactured.
Once a supplier extends a warranty over its product, the distributor must comply with the requirements imposed by the Regulation against Deceptive Practices and Advertisements in connection with the advertisement of such warranties to the consumer.
Are there restrictions on the exchange of information between a supplier and its distribution partners about the customers and end-users of their products? Who owns such information and what data protection or privacy regulations are applicable?
The federal rules and regulation that protect consumer privacy and consumer personal information, such as those provided by the Federal Trade Commission, apply in Puerto Rico. See, for example, 16 CFR sections 313.1 to 313.18. In addition, under the Regulation against Deceptive Practices and Advertisements, a distributor cannot obtain personal information of any consumer unless such information is voluntarily provided by the consumer and the consumer is advised as to the use that will be given to such information. The information provided by the consumer on a voluntary basis may not be used to promote offers through telemarketing, unless the consumer has expressly consented in writing to such use. The distributor must take the necessary measures to protect the privacy, confidentiality and integrity of the personal information provided by the consumer. The distributor must also notify the consumer of security breaches of personal information.
Under the EU Schrems decision, if suppliers or distributors collect personal identifiable information of an EU person, the supplier or distributor should protect such information in accordance with EU data protection laws. If the supplier is self-certified under the Privacy Shield regime, it must comply with the privacy principles under such regime.
May a supplier approve or reject the individuals who manage the distribution partner’s business, or terminate the relationship if not satisfied with the management?
Suppliers and distributors are generally required to be independent from each other for Law 75 or Law 21 to apply, but a distribution agreement may require a distributor to maintain a certain type of management structure, ownership or standards of quality. However, under Law 75, a supplier will not have just cause to terminate the distribution relationship due to a change in the distributor’s management unless the distribution agreement provided specifically for that possibility and the supplier can show that the breach will substantially and adversely affect (or has affected) the distributor’s interests in the development of the market, the distribution of the merchandise or rendering of the services in question. The supplier will bear the burden of proof to show such injury. The supplier’s vetting, approval or disapproval of employees of the distributor, or of their actions, could potentially subject the supplier to employer liability alongside the distributor.
Are there circumstances under which a distributor or agent would be treated as an employee of the supplier, and what are the consequences of such treatment? How can a supplier protect against responsibility for potential violations of labour and employment laws by its distribution partners?
The interaction between the supplier, the distributor and the distributor’s employees, as a whole, will be analysed to determine whether an employment relationship exists. Various factors will be taken into consideration to determine the existence of an employment relationship.
The determining factor is that of control retention. An employment relationship exists where the principal or supplier has the right to control the contractor’s, the distributor’s, or the distributor’s employees’ work not only as to the end result, but also as to the manner and means by which the result is accomplished. Examples of control include, but are not limited to, the ability to approve or deny overtime, payment of bonuses and designation of employees to work in specific capacities.
The risk of having a distributor as an employee of the supplier is that the supplier will be exposed to Puerto Rican and US labour and employment legislation.
A supplier can take various measures to avoid creating employee relationships with its distributors, among which are the following:
- the distributor should be free to engage in other enterprises or economic activities;
- the distributor should have an employer social security identification number;
- the distributor should obtain its own workmen’s compensation insurance policies;
- the distributor should determine his or her own schedule of work and that of its employees;
- the supplier should not require specific days or hours of service;
- the supplier should not supervise the manner in which the distributor renders its services; and
- the supplier may only pass judgement on end results to determine whether the service relationship is beneficial to the supplier.
Is the payment of commission to a commercial agent regulated?
No, but general tax withholding obligations will apply to such payments.
Good faith and fair dealing
What good faith and fair dealing requirements apply to distribution relationships?
Good faith and fair dealing requirements apply to all contractual relations, including the negotiation, performance and termination of distribution relationships.
Registration of agreements
Are there laws requiring that distribution agreements or intellectual property licence agreements be registered with or approved by any government agency?
To what extent are anti-bribery or anti-corruption laws applicable to relationships between suppliers and their distribution partners?
Anti-bribery or anti-corruption laws apply to relationships between suppliers and their distribution partners in the event that they involve making payments or providing anything of value to government officials to assist in obtaining or retaining business.
Prohibited and mandatory contractual provisions
Are there any other restrictions on provisions in distribution contracts or limitations on their enforceability? Are there any mandatory provisions? Are there any provisions that local law will deem included even if absent?
In addition to the restrictions set forth under Law 75 already discussed, Law 75 provides that the rights granted under that statute cannot be waived. See restrictions on choice of law and forum selection clauses in questions 37, 38 and 40.
Governing law and choice of forum
Choice of law
Are there restrictions on the parties’ contractual choice of a country’s law to govern a distribution contract?
Distribution and sales representation contracts must be interpreted pursuant to and governed by the laws of Puerto Rico, and any other stipulation to the contrary will be void. The use of arbitration agreements to settle disputes may affect this provision, particularly when the arbitrator is given broad powers and depending on how the arbitration clause is negotiated and drafted.
Choice of forum
Are there restrictions on the parties’ contractual choice of courts or arbitration tribunals, whether within or outside your jurisdiction, to resolve contractual disputes?
Although Law 75 originally prohibited arbitration outside Puerto Rico, that prohibition is no longer valid. Forum selection clauses, on the other hand, requiring the parties to litigate in Puerto Rican courts, have been enforced on some occasions but not on others. The issue remains an open question to be decided on a case-by-case basis where Law 75 is concerned.
Under Law 21, however, the courts are more likely to uphold forum selection clauses and arbitration outside Puerto Rico is similarly not prohibited.
Dispute resolution procedures
What courts, procedures and remedies are available to suppliers and distribution partners to resolve disputes? Are foreign businesses restricted in their ability to make use of these courts and procedures? Can they expect fair treatment? To what extent can a litigant require disclosure of documents or testimony from an adverse party? What are the advantages and disadvantages to a foreign business of resolving disputes in your country’s courts?
Puerto Rico has its own judicial system consisting of a Court of First Instance, appellate courts and the Supreme Court of Puerto Rico. Parties may also have access to the US District Court for the District of Puerto Rico, a federal court sitting in Puerto Rico with the same powers and jurisdiction as similar courts in the United States.
Both suppliers and distributors have equal access to either of these courts, with the main restriction being the existence of federal jurisdiction for litigation in federal court. This requisite will generally be met in the case of foreign suppliers. Foreign suppliers will also need to post a non-resident bond in local Puerto Rican courts to secure payment of costs or attorneys’ fees. Such bond is not required by rule in federal courts. Either court must, of course, also have personal jurisdiction over the parties in the litigation.
Both court systems may provide relief in law and equity, such as the provisional remedy discussed in question 10.
Foreign suppliers can expect fair treatment in either court system. Under both systems, litigants may require disclosure of documents or testimony before trial. An important difference between the two systems is that a jury is not available in civil or commercial disputes brought in local Puerto Rican courts whereas jury trial is available for those types of disputes in federal court.
There are no particular advantages or disadvantages to a foreign business resolving disputes in Puerto Rican courts, except for those that any party would encounter or perceive when litigating in a foreign country, such as the costs and burden of attending proceedings away from home and under perhaps quite different procedural rules, hiring and working with local counsel and dealing with the generally perceived notion that a local court might favour the local party due to some type of national or territorial prejudice or protectionism. Both of the systems in Puerto Rico, however, are predicated on tenets of due process of law, like those underlying dispensation of justice in the United States and other countries.
Alternative dispute resolution
Will an agreement to mediate or arbitrate disputes be enforced in your jurisdiction? Are there any limitations on the terms of an agreement to arbitrate? What are the advantages and disadvantages for a foreign business of resolving disputes by arbitration in a dispute with a business partner in your country?
An agreement to arbitrate disputes will likely be enforced in Puerto Rico. If the dispute is brought under Law 75, however, before the dispute is submitted to arbitration any of the parties must request that a court with jurisdiction in Puerto Rico determine that said clause or arbitration agreement was subscribed freely and voluntarily. Law 75 also creates a rebuttable presumption that any arbitration agreement or clause in a distribution agreement was included or subscribed at the request of the supplier and is an adhesion contract.
There are no limitations (such as on the arbitration tribunal, the location of the arbitration or the language of the arbitration) on the terms of an agreement to arbitrate.
The main advantage of arbitration for a foreign entity is the opportunity to reach an agreement with the local distributor or representative to resolve a dispute outside Puerto Rico and under a law other than Puerto Rican. It is always possible, however, that a court or arbitrator may end up deciding to apply Puerto Rican law regardless of the agreement of the parties. The choice of forum for the arbitration, however, is most likely to be enforced either by courts or arbitration tribunal.