Summer 2003-10 Court of Appeals affirms that sale of product line is just cause to terminate distribution contract

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Number 52
Summer 2003
Follow up

Court of Appeals affirms that sale of product line is "just cause" to terminate distribution contract

Last year the U.S. District Court for the District of Puerto Rico ruled that sale of a product line by a principal constitutes "just cause" under Law 75 for the termination of a distribution contract. V. Suarez & Co., Inc. v. Dow Brands, Inc., 2002 U.S. Dist. LEXIS 7880. Now the Court of Appeals for the First Circuit has affirmed that ruling. 2003 U.S. App. LEXIS 14540 (1st Cir.)

"Just cause"

The Puerto Rico Dealers' Act (known in legal and business circles as "Law 75") protects distributor contracts:

"No principal or grantor may directly or indirectly perform any act detrimental to the established relationship, or refuse to renew said contract on its normal expiration, except for just cause." 10 P.R. Laws Ann. § 278a.

"Just cause" is defined in 10 P.R. Laws Ann. § 278(d) as the "nonperformance of any of the essential obligations of the dealer's contract, on the part of the dealer, or any action or omission on his part that adversely and substantially affects the interests of the principal or grantor in promoting the marketing or distribution of the merchandise or service." But a plain reading of the definition, the Court of Appeals pointed out, would produce absurd and constitutionally suspect results. As a consequence, the courts that have construed it have filled in other readings.

Withdrawal from market

Withdrawing from the Puerto Rico market constitutes "just cause." However, in the case before the court, the principal-Dow Brands, Inc.-sold the product line to another company-S.C. Johnson & Son, Inc.-who continued to distribute the products on the island, albeit using its own local distributors. V. Suarez, Dow's distributor, lost the lines as a result. Did Dow "withdraw from the market" if the products are still being sold here?

Good will

Suarez averred that Dow had appropriated its good will and established clientele when it sold the lines to S.C. Johnson. Dow was surely able to fetch a higher price because of the market that Suarez had created. However, the Court of Appeals found that Law 75 is not necessarily violated if there is an opportunity to trade on the good will built up by a distributor. "importantly," the court indicated, "this is not an instance in which the defendant, here Dow, benefits by substituting itself for its dealer which built up the brands in the Puerto Rico market. There is none of the unfairness, caused by a principal and from which the principal benefits, that Act 75 was meant to prevent."

By selling the line Dow actually withdrew from the market, which constituted just cause. Therefore, the Court of Appeals affirmed last year's ruling by the District Court. n

© 2003 Goldman Antonetti