Doing Business in Puerto Rico Blog: Business Coaching, News & Developments

Merchants in PR Must Issue Sales Receipts

All businesspeople in Puerto Rico engaging in the sale of goods and/or services must issue a legible receipt at the time payment is received,  describing the date of the transaction, the nature of services or products purchased, the person or entity receiving payment and the amount and method of payment.

Act No.  42 of January 27, 2006 instructs the Department of Consumer Affairs to amend Regulation 6772 of February 19, 2004, to include said provisions as part its rules  on deceitful advertising and practices.

Amendments to PR Closing Law

Puerto Rico’s  ‘Closing law’,  Ley para Regular las Operaciones de Establecimientos Comerciales, Act 1 of December 1, 1989, as amended,  requires all retail stores to remain closed during certain hours.  From Monday to Saturday  a store can remain open from 5:00 a.m. to midnight and on Sunday between the hours of 11:00 a.m. to 5:00 p.m.  During particular holidays, stores must remain closed. There are exemptions and other provisions depending on the type of day, store involved, the nature of  goods  sold  and the number of employees. 

Operating outside the allowed time period  subjects the merchant to potentially serious civil and criminal penalties. Exposure is two-fold; opening the store and scheduling employees to work. Each violation is separate and enforced by two different local government agencies. The Department of Justice, Antitrust Division (Asuntos Monopolisticos) deals with the opening issue and the Department of Labor investigates employment violations.

Legislation this year (Act 24 of January 23, 2006)  doubled the maximum number of employees a business can have to remain exempt from the law;  from seven (7)  to fifteen (15). This means that now more businesses can remain open during Closing Law hours.

Restrictions on Social Security Number Use Now Extended to Employers

I had reported earlier that the government of Puerto Rico had enacted legislation on September 1, 2006  banning all educational institutions from using the Social Security as an identification number. A similar law was enacted on September 27, 2006- Act No. 207- covering   private employers (and public corporations).  It prohibits the use  social security numbers in identification cards, routine documents or other  documents of general circulation.  The Department of Labor is charged with enforcing this law.

An earlier law, Act, No. 187 enacted on September 1, 2006,  imposes similar requirements on entities that do business with the government or receive funds or donations.

Similarly, laws governing the purchase of property in PR eliminated the requirement to include in the deed of purchase the social security number of the parties to the agreement.

Petland Sues Former Franchisee in Puerto Rico for Trademark Infringment

A former franchise owner of a Petland store was sued in the US District Court of Puerto Rico for alleged  trademark infringement, false advertisement, unfair competition, non-compete clauses,misappropriation of trade secrets, damages and other causes of action. The operation involved is located at Plaza del Norte Mall in Hatillo, Puerto Rico.  Included are defendants Ivan M. Arbelo, his mother Paulina Linares García and PetCo-PR. The complaint filed by Petland shows the enormous control a franchisor has over its franchisees, during and after the  end of their contractual relationship.

By virutue of continuing operations despite no longer holding a franchise, Petland claims that defendants  engaged in a number of legal violations. Paulina Linares, got entangled in this legal mess when- she created  PetCo-PR Corporation and assumed control of  the Petland store in Hatillo.  The problem was that that his son no longer had the franchise (for failure to pay royalties) and they both failed to notify Petland or seek its approval.

The lengthy counts of legal violations listed in the complaint mirror the  intricate maneuvers defendants engaged in.  Even Mrs. Linares García is at risk of being held personally liable; an issue that has support by the applicable law. Usually forced solutions bring bigger problems.   That may be the case  with the  pet store.

Franchising is not for everyone.  It is a binding legal relationship where the franchisor retains enormous control over its franchises. Failure to comply with the agreement- be it non payment of royalties, failure to abide by performance standards or  not following whatever was agreed to- gives the franchisor the opportunity to  terminate the relationship; putting to waste the enormous time, effort and money invested.   

Broker Not Liable for Problems With Insurance Policy Application

Sealink brought action against insurance broker Frenkel & Company alleging that it was denied coverage under marine insurance policy placed by its broker, because  of the broker's alleged negligent misrepresentation of past casualties associated with its vessel the M/V Sealink Express. Sealink alleged that the broker had failed  to adecuately explain and advise on the terms and conditions of Sealink's insurance policies. The Court dismissed the case on the grounds that under Puerto Rico law a broker has no duty to review an insurance application for truthfulness or accuracy of the information contained therein before sending it to underwriters. In such cases, the broker was simply carrying out the instructions given by the assured. It was up to the assured who knew all the circunstances material to the risk- to disclose the facts to the underwriter; rather than waiting for the underwriter to ask.  By failing to disclose material facts, the underwriter could void the policy.  Sealink v. Frenkel & Co., US District Court Puerto Rico, Civil No. 04-1709 (DRD), July 31, 2006.

In this case, the insurance application was  almost entirely prepared by Sealink's President an CEO. He signed the application warranting that the information  was complete and accurate. He also signed  acknowledging that  the  underwriters were relying "on the information and representations listed  in determining acceptability, rates, and conditions of coverage. . . ;"  that any misrepresentation or omission would be “ground for immediate cancellation of coverage and denial of claims;” and that  Sealink was “under a continuing obligation” to notify underwriters of any material alteration to the “nature, extent or size” of the operation. The broker  verified that the application was signed but did not review its contents.

Sealink's vessel suffered a fire and was declared total loss.  The Insurance Company later denied coverage and voided the policy because Sealink had allegedly engaged in:

(1) material misrepresentations on the application related to the affiliation with an entity involved in bankruptcy proceedings; (2) failure to disclose uncommonly high number of detentions by the U.S. Coastguard due to the poor maintenance and structural damage to the vessel; (3) failure to disclose threats of physical violence made by the crew while on the Dominican Republic during a wage dispute; (4) material misrepresentation or failure to disclose the true market value of the vessel; and (5) material failure to disclose grounding and repeated instances of contact damage and casualty loss history.

Sealink sued its insurance broker blaming it for the voidance of the policy. The Court ruled that  maritime law was  not at  issue because the contract was one to procure the insurance. It did not involve the (maritime) insurance itself. The issue was grounded on Puerto Rico law, between the broker and the assured; not the insurance company.

The query the Court must now address is, under a broker-assured relationship, whose responsibility is it to properly fill out the insurance application and ensure the accuracy and completeness of the information contained therein. From the text of the Insurance Code of Puerto Rico, the Civil Code of Puerto Rico, and interpretations of the Supreme Court of Puerto Rico, the Court can only conclude that it is the sole responsibility of the assured to complete the insurance application and ensure its accuracy.

This case illustrates what can happen when an assured fails to provide all the facts in an insurance application. Besides paying the premium,  the other obligations an assured has are - to provide accurate and timely information and; "notify the insurer or broker of any claims covered by the insurance policy in a timely manner; and make truthful and complete representations on the insurance application of material matters."

Pall to Expand Life Sciences Manufacturing in Puerto Rico

East Hills, NY (October 3, 2006) - - Pall Corporation (NYSE: PLL), the global leader in filtration, separations and purification, announces plans to expand its Life Sciences manufacturing operations in Fajardo, Puerto Rico.  The planned establishment of a Life Sciences Center of Excellence will significantly expand Pall’s capacity on the island enhancing its ability to meet the increasing demand for its high quality technologies by the world’s leading pharmaceutical and biotechnology companies, blood centers and hospitals.  Pall expects to invest around $50 million in facilities, machinery and equipment and add more than 250 full-time jobs in Puerto Rico by the year 2010.  The Hon. Aníbal Acevedo-Vilá, Governor of the Commonwealth of Puerto Rico and Eric Krasnoff, Chairman and CEO of Pall made the announcement today at the Pall Fajardo plant.

The expansion in Puerto Rico is another step in Pall's standardization and consolidation of its global manufacturing footprint.  The Company anticipates that Puerto Rico’s competitive tax rate combined with its facilities optimization program will result in an incremental after tax benefit of more than $10 million annually in three years.

“Puerto Rico’s attractive business climate and strong commitment to developing biopharmaceutical manufacturing capability are key factors in bringing numerous drug and biotechnology companies to the island. Expanding our operations in Puerto Rico is an important part of our strategic approach of aligning with customers worldwide and increasing production in lower tax rate jurisdictions,” says Mr. Krasnoff.  Pall's BioPharmaceuticals business, which represents 15% of total sales, has been growing by double-digits as an increasing number of drugs go into production and the Company's market share grows.

“We are extremely pleased by Pall’s decision to expand in Puerto Rico as it enables us to retain a preeminent supplier to the global biopharmaceutical manufacturing industry.  We will continue to work together to assure Pall’s welcome here as its presence is a critical component in helping us meet our roadmap goal of extending Puerto Rico capabilities across the entire life sciences value chain,” says Boris Jaskille, Executive Director of the Puerto Rico Industrial Development Company (PRIDCO).

Pretending Not to Know: When Independent Contractors Are Employees

Employers in Puerto Rico who misclassify  employees as independent contractors, are taking a serious gamble. This common mistep is prone to happen in small privately owned businesses.  Through  plain ignorance or audacity - these employers attempt to circunvent  all  employment legislation in the name of business efficiency and profitability. These employers believe that if they hire a person as an independent contractor; no labor issues need to be dealt with.

The enormous breath of federal and state rules and regulations may overwhelm employers to a frustrating dead end but there is no easy way around regulations when staffing a company; best to take the high road and avoid  audits, lawsuits, and considerable legal exposure.

With so many employment regulations, workers  in Puerto Rico have come to expect a certain level of  benefits and protection.  Anyone who learns that he/she is not entitled to a meal period, overtime, fringe benefits, vacation,  sick leave or whatever will become suspicious; particularly if it is told  that he/she is not really an employee but an entrepreneur who is engaging in contractual services.

The problem usually arises- not when the employee becomes weary about his/her status but- when something bad happens. Let's say the worker at a company becomes injured in the job and  needs medical attention.  Most likely, the State Insurance Fund ( the public agency that governs Puerto Rico's workers' compensation laws)  will pass the medical bill to company  since  that person is not an insured employee. Furthermore,  once the employee learns that the company is not covered by the statutory immunity awarded to employers  (under the workers' compensation statute), the employee may sue the company  and recoup  additional damages  if he/she shows that the injury was  a result of the company's  fault or negligence.  This is not theory, it happens continually; and this is just one of many situations that arise when workers are misclassified as independent contractors.

To avoid unecessaary exposure to  liability,  employers  who have independent contractors in their workforce should sit down with their attorney and  conduct a thorough review of their particular  relationships to determine if they are valid and pass legal scrutiny.

Bars Liable For Drunk Drivers' Actions

A bar that sells alcohol to a visibly intoxicated person who subsequently causes damages while driving a car will be liable for the damages caused.  It must be shown however that the establishment was at fault or acted negligently and that there was a causal link between the sale of the alcohol and the damage caused. This is the ruling and opinion of Puerto Rico' Supreme Court in the case of  Ana Lopez v. Leonor Porrata, decided October 4, 2006.

The Court decided to ‘legislate’ the civil responsibility that comes with the profitable business of selling alcohol to drivers.  It relied on the ever resilient and mutating sec. 1802 of the Civil Code, 31 L.P.R.A. 5141. This law provides that “a person who by an act or omission causes damage to another through fault or negligence may be held liable” and must redress the damage caused by the wrongful or negligent act. Negligence arises in many forms including lack of prudence and disregard for the security of others and in  cases like this- by selling drinks irresponsibly knowing the risks associated.   The court argued that a barkeep could reasonably foresee that an intoxicated patron leaving the establishment would likely be driving a car and create  a security risk for himself and others.

Restrictions on Social Security Use by Educational Institutions

In an effort to prevent identity theft, the government of Puerto Rico recently enacted Act 186 of September 1, 2006, banning  all educational institutions from using  the Social Security as an identification number. This includes elementary, middle and high schools, trade schools, colleges and universities operating in the Island under license or accredited by the government.

Act 186 specifically prohibits these institutions from providing or listing the number as a method of identifying a student except for “internal confidential use; nor make it accessible to any person who has no need nor authority to such data.” When a document containing a social security number must be made public, the academic institution will edit it in such a way to make the number partial or totally illegible. These protections may be voluntarily waived by students of legal age; but can never be made a prerequisite for credits, graduation, obtaining transcripts or the rendering of services.

This law will not apply when the social security number is required or authorized by a law or a federal regulation or for internal identity purposes and subject to the institution maintaining its confidentiality. Both the Superior Education Council (universities) and General Education  Council  (schools and others) may levy fines between five hundred (500)  and five thousand (5,000) dollars to those institutions that fail to comply. The law will become effective 90 days after enactment. 

PR Courts Lack Jurisdiction on Discharge Claim Based on Union Affiliation

An employee filed a charge before the National Labor Relations Board alleging that her employer Sulsoni Hospital had fired her for engaging in union activities. During the process, the parties settled the claim and entered into an agreement that was subsequently approved by the Board. In the agreement, the Hospital did not admit to any wrongdoing or responsibility under the National Relations Act.  Afterwards, the employee’s husband and children sued the Hospital for damages arising from the alleged wrongful discharge.

The Hospital requested the dismissal of the action arguing that the court lacked jurisdiction because the claim was preempted by the National Relations Act (NLRA). The Hospital argued that if the court ruled in favor of the employee, it necessarily had to conclude that the employee had been discharge for her union activities an issue of the exclusive jurisdiction of the National Relations Board.

While the Court acknowledged that under PR law, relatives of a wrongfully discharged employee can sue the employer under the general torts statute, Article 1802 of the Civil Code (for abusive conduct against the employee for example), when the claim is based on conduct prohibited by section 8 of the NLRA, local courts had no jurisdiction because as the U.S. Supreme Court has reasoned, “to allow the States to control conduct which is subject of national regulation would create potential frustration of national purposes.” San Diego Building Trades Council v. Garmon, 359 U.S. 236 (1958). 

By allowing the controversy to be re-litigated in the local forum, the courts were potentially interfering with the labor policy of the National Labor Relations Board. This case is consistent with previous case law in Puerto Rico.  See also, Rivera v. Security National Life Insurance, 106 DPR 517 (1977).