United States: Law 75 Action Stayed, Plaintiff To Submit To Arbitration

On September 29, 2000, the United States District Court for the District of Puerto Rico stayed plaintiff González Tigera Warehouse Distributors, Inc. s ( GT ) Law 75 action against codefendants Ohtsu Tire & Rubber Co., Ltd. ( Ohtsu ), T. Chatani & Co. ( Chatani ), and Falken Tire Corp. ( Falken ), and ordered GT to submit its claim to arbitration pursuant to the Commercial Arbitration Rules of the Japan Commercial Arbitration Association (JCAA).

In January of 1969, GT and co-defendants Ohtsu and Chatani entered into an exclusive distribution agreement (the Agreement ) whereby Ohtsu appointed GT as the sole distributor of Ohtsu tires in Puerto Rico. In the Agreement, Ohtsu agreed to supply GT with tires and tubes for sale in Puerto Rico through its exporter Chatani.

At an unspecified time in 1983, Ohtsu began manufacturing tires under the Falken brand name, and exporting them through Chatani. In March 1984, GT began purchasing Falken tires, purportedly pursuant to the Agreement. At some point in time, Ohtsu also began selling Falken tires to Falken for distribution in Puerto Rico. GT contends that Ohtsu s sale of Falken tires to Falken is a violation of the Agreement and contrary to Law 75, as Falken tires are included in its exclusive distribution rights for the sale of Ohtsu tires under the Agreement.

The over thirty year old Agreement between Ohtsu and GT included an arbitration clause that provided the following: All disputes, controversies, or differences which may arise among the parties hereto out of or in relation to or in connection with this agreement or any transaction based upon this agreement, in the breach thereof, shall be finally settled by arbitration pursuant to the Commercial Arbitration Rules of the Japan Commercial Arbitration Association having its head office at Tokyo, Japan, by which each party hereto is bound.

In choosing to enforce the arbitration clause in the Agreement, the district court upheld the long established rule set by the United States Supreme Court in the case of Mitsubishi v. Soler ChryslerPlymouth, Inc., 473 U.S. 614 (1985), that the Federal Arbitration Act (the FAA ), being a federal law, preempts Puerto Rico s Dealer s Act ( Law 75 ). Accordingly, the presence of a valid arbitration agreement preempts Law 75 s prohibition against submitting a Law 75 claim to arbitration. The district court also held that because the arbitration clause did not explicitly state where the arbitration should take place, the arbitration should take place in Puerto Rico. Defendants argued that if there was any controversy regarding the location of the arbitration, such controversy was contract-generated and arose out of the Agreement, and therefore, it was for the arbitrators, not the courts, to decide. Notwithstanding that argument, the district court apparently believed that arbitration in Japan would cause extreme financial pressure on GT who is currently a debtor-in-possession under Chapter 11 of the United States Bankruptcy Code.

It is unclear, however, whether the Court would have ruled the same way had the arbitration clause explicitly stated that arbitration was to take place in Japan. It is quite possible that due to the strong presumption in favor of enforcing negotiated arbitration agreements, if the arbitration clause had explicitly stated that arbitration was to take place in Japan, the distributor would not have been able to overcome the terms of the Agreement regarding the place where arbitration would take place.

This case highlights the importance of well drafted arbitration clauses to guarantee that a contracting party will reap the benefits of arbitration, rather than risk a jury trial.

Ohtsu, Falken and Chatani were represented by AMG&B attorneys Danilo M. Eboli and Marshal D. Morgan.