Monday, December 5, 2016

Lesson repeated: if you do not sue on time, you lose, and a distributor is again kicked out of court

This case turns on the scope and reach of an exclusive distribution relationship arising from a verbal agreement or a course of dealings and the application of the three-year statute of limitations for Law 75 actions. The lengthy opinion of the First Circuit may be explained, as described by the court itself, by the “Alice in Wonderland” quality of inconsistent arguments raised by the parties rather than the complexity of any of the substantive issues at stake.

In Medina & Medina, Inc. v. Hormel Foods, 840 F. 3d 26 (1st Cir. 2016), the thrust of the First Circuit’s holding is unremarkable and finds support in the court’s Basic Controlex and Butterball line of cases. That is, the distributor in Medina failed to file in court a Law 75 claim for impairment of a gentleman’s handshake agreement for the alleged exclusive distribution of the Hormel refrigerated retail line of provisions in Puerto Rico within three years after Medina knew or should reasonably have known of the facts supporting its claim. More than three years elapsed from the moment when Hormel first clearly informed Medina that its exclusivity did not extend to sales of Hormel’s refrigerated products made to customers outside of Puerto Rico for resale to club stores within Puerto Rico.

That being said, the First Circuit reinforces in this case settled doctrine that the contours of Law 75 rights, in the absence of a specific remedial provision in the statute, are defined by the verbal or written agreements between the parties. The case also answered the lingering question, albeit in dicta that, if the parties agreed to an exclusive distribution arrangement, there would be no antitrust implications from it.

About line extensions, the First Circuit also affirmed on the merits the district court’s separate ruling that Medina had no basis to claim that it had a right to new Hormel products because it did not prove that Hormel had obligated itself to sell to Medina every new refrigerated product it developed or that Hormel had sold any new products through another Puerto Rico-based distributor for the statutory presumption of lack of just cause to apply.

The First Circuit ratified the Gussco and Irvine line of cases, among others, holding that Law 75 protects contractually-acquired rights, so that if the principal agreed to grant “airtight exclusivity” (a concept not defined in Law 75) to prevent competing sales not only by Puerto Rico-based distributors but by resellers outside of the territory for resale within Puerto Rico, the principal would have to take prompt affirmative action to curtail those sales practices. Thus, held the court, “[t]he dependency of Law 75’s protection on the terms of the contract applies equally to the scope of any protected exclusivity.” And, Medina should have sued promptly after learning that Hormel had a different understanding of Medina’s contractually-acquired rights. For the same rationale, the First Circuit reversed the lower court’s refusal to dismiss Medina’s claim of impairment for sales of the “party-platter” product line in Costco because it also hinged on the time-barred exclusivity claim.

Looking back, the distributor in this case should have sued earlier than it did and that’s not rocket science. But, it is understandable from a business standpoint, though perilous, that the distributor would first try to negotiate better terms with the principal, request better pricing, or demand the principal to take affirmative steps to protect its territorial exclusivity from intrabrand competition before resorting to litigation that would irreparably damage their business relationship. Distributors face a Hobson's choice where you lose rights if you do not sue and lose the trust of the partner if you do. This can be attributed to civil code rules and judicial interpretations on prescription of actions. The message of this case is clear for the distributor to sue on time and then talk.

On the other hand, there are lessons to be learned by the principal, too. Never mind, that before Medina, Hormel had an unpleasant business experience with a distributor in Puerto Rico and had been dissuaded from going into the market knowing that Law 75, according to Hormel, was a “cut-throat” law. This makes it difficult to understand why Hormel would agree to do business with Medina without a written contract having all the bells and whistles to avoid the uncertainty and problems created by different understandings of the parties as to the scope and reach of exclusive distribution rights.