Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION NEWS: Supreme Court asked to review stay of liquor distribution dispute, (Sep 16, 2013)

By Peter Reap, J.D., LL.M.

Bacardi International Limited (BIL) has asked the U.S. Supreme Court to review a decision of the U.S. Court of Appeals in Boston staying proceedings brought by BIL to confirm an arbitration award under the Federal Arbitration Act against a liquor sub-distributor, V. Suarez & Co., Inc. (VSC). In its petition for certiorari, filed September 9, BIL asks the High Court whether, under Moses H. Cone Memorial Hospital v. Mercury Construction Corporation, 460 U.S. 1 (1983), “the First Circuit was free to surrender subject-matter jurisdiction over a motion to confirm a ‘final and binding’ arbitral award brought under Section 9 of the Federal Arbitration Act, 9 U.S.C. §9, by staying the federal proceedings in deference to a parallel state court action, without taking into account the Act’s policies requiring piecemeal litigation to enforce the arbitration agreement” (Bacardi International Limited v. V. Suarez & Co., Inc., Dkt. 13-320).

In 2004, BIL subsidiary Bacardi Caribbean Corporation (BCC) executed an agreement with VSC granting VSC the exclusive right to sell and sub-distribute certain Bacardi-branded products in Puerto Rico. BIL consented to the agreement, as did BC, another Bacardi subsidiary. The agreement included grounds to permit termination for “just cause,” limitations on damages, and provisions for dispute resolution requiring arbitration.

The dispute resulting in arbitration began on May 29, 2009, when the president and CEO of BC notified VSC by letter that BC (as successor to BCC) did not intend to renew the subdistribution agreement. The letter stated that BC intended to use the alternative dispute resolution mechanism in the subdistribution agreement to resolve any disputes arising out of or related to the non-renewal of the agreement. BIL, BC, and BCC filed a demand for arbitration against VSC. The Bacardi entities made two claims in the demand: (1) a declaration that a $2.1 million offset provision in the distribution agreement was valid and binding; and (2) in the alternative, that the Bacardí entities had just cause to terminate or refuse to renew the sub-distribution agreement.

The arbitration panel bifurcated the proceedings to decide first whether the contested provisions of the contract were valid and binding. As a result, the panel would not pass on the just cause defense, VSC’s claims for damages, or the Bacardí entities’ other defenses until a later time, and then only if necessary. The panel issued a Final Partial Award on the bifurcated issue on July 19, 2011. In a seventy-two page opinion, the panel found the contested provisions, including the offset and the limitations on compensation for certain expenses and investments, to be valid and enforceable.

Dissatisfied with the award, VSC, on August 5, 2011, initiated a special proceeding against BC, BCC, and BIL before the Court of First Instance in Puerto Rico seeking to vacate the award. On September 1, 2011, BIL, BC, and BCC filed a notice of removal in the federal district court in Puerto Rico.

The next day, BIL filed a separate action, this case, in federal court, in its name only, moving to confirm the award under the FAA. The removed matter and BIL’s FAA confirmation proceeding were consolidated on September 20, 2011.

On September 29, 2011, VSC sought to remand the removed action. VSC also sought to dismiss BIL’s federal action under Fed. R. Civ. P. 12(b)(1). The heart of VSC’s argument was that BC, a Puerto Rico corporation, was a required and indispensable party under Fed. R. Civ. P. 19, and since it was non-diverse with VSC, diversity jurisdiction was lacking in both matters.

The district court remanded the removed VSC case. The court held that VSC’s inclusion of BC in the case removed from state court was proper because BC’s interest in the litigation was real. BC was not just a nominal party named to destroy jurisdiction. The court had to consider BC’s citizenship in the jurisdictional analysis and that divested the federal court of jurisdiction because BC and VSC are both citizens of Puerto Rico.

The district court also dismissed BIL’s federal case. The district court found that BC was an indispensable party under Fed. R. Civ. P. 19(b), that BC’s presence would destroy diversity, and that VSC’s Rule 12(b)(1) motion should be granted.

On December 9, 2011, BIL filed a timely appeal with the First Circuit from the court’s order of dismissal. Before arguments were heard in the First Circuit, the Commonwealth Court of First Instance decided the remanded case on July 23, 2012. The Court of First Instance denied VSC’s request to vacate the award and confirmed the award.

Rule 19 and the First Circuit Opinion. The First Circuit ruled that the district court erred in its Rule 19 analysis. Rule 19 addresses situations where a lawsuit is proceeding without a party whose interests are central to the suit. The Rule provides for joinder of required parties when feasible, Fed. R. Civ. P. 19(a), and for dismissal of suits when joinder of a required party is not feasible and that party is indispensable, Fed. R. Civ. P. 19(b).

The First Circuit held that BC was not a required party under Rule 19(a)(1) in the petition to confirm the first-stage arbitral award. It determined that complete relief could be afforded among those already parties in BC’s absence under Rule 19(a)(1)(A). In addition, resolution of the petition to confirm the arbitration award in BC’s absence would not impair or impede BC’s ability to protect its interest. Finally, disposition of the petition in BC’s absence would not leave BIL or VSC subject to a substantial risk of double, multiple, or otherwise inconsistent obligations because of BC’s absence, according to the appellate court.

Having found dismissal for want of jurisdiction to be in error, the appellate court would ordinarily reverse the district court’s dismissal and remand for further proceedings, it noted. However, in this unusual case, the dispute was remanded and the district court ordered to stay further proceedings pending the outcome of the Commonwealth court proceedings. Considerations, including those of wise and sound judicial administration and comity, persuaded the First Circuit that a stay was warranted until the parallel case in the Commonwealth courts was concluded.

Reasons for granting the petition for certiorari. BIL argues in its petition that the First Circuit’s sua sponte order to stay proceedings disregards the Supreme Court’s holding in Moses H. Cone mandating that the FAA’s policies be weighed against abstention. It also contends that the First Circuit’s order to stay proceedings disregards the parties’ consent to confirmation under Section 9 of the FAA, which conflicts with the Supreme Court’s precedents mandating rigorous enforcement of arbitration agreements.

BIL asks the High Court to summarily reverse the decision below, or, in the alternative, to accept the case for plenary review.

Attorneys: Ricardo F. Casellas (Casellas Alcover & Burgos P.S.C.) for Bacardi International Limited.

Companies: Bacardi International Limited

News: FranchisingDistribution