Do commission payments to a distributor for direct sales made by the principal create an exclusive distribution relationship under Laws 75 or 21?

An exclusive distribution relationship may be established by: 1) an expressly exclusive written distribution agreement, or 2) in the absence of an integrated written agreement, by evidence of a verbal exclusive agreement or a course of dealings or course of performance between the parties establishing de facto exclusivity.

At least where an expressly non-exclusive agreement is in effect between the parties, courts have ruled that the payment of commissions is not evidence that the principal has waived its right to sell products directly or through another distributor in competition with its alleged exclusive distributor. In Print, Medical Books Inc. v. Harcourt, Inc. 93 Fed. Appx. 240, 241, 2004 WL 528433, 1 n.1 (1st Cir. 2004)(unpublished)(“The plaintiff contends that the payment of a 10% override commission on all direct sales by the defendant in Puerto Rico rendered the distribution agreement exclusive. We do not agree. The essence of a non-exclusive agreement is that the manufacturer (or, as here, the publisher) retains the right to sell its wares to others, including other distributors, as it sees fit. [citation omitted]. The defendant at all times retained that right”).

Things get like quick sand for the principal, where there is no written agreement or a material factual dispute exists as to whether a non-exclusive written agreement continues to govern the relationship between the parties.

In those circumstances, a distributor has been able to avert the entry of summary judgment on the issue of exclusivity with an argument that, over a period of years, it has been the sole reseller of the principal’s products in Puerto Rico or the principal has paid a commission for selling products directly. Kellogg USA v. B. Fernandez, 2010 WL 376326 (D.P.R. Jan. 27, 2010)(Gelpi, J.)(Out of full disclosure the author represented Kellogg in that case). The distributor’s argument in that case was that the principal would not have been contractually obliged to pay any commissions if the relationship had been non-exclusive. The court decided that this allegation created a triable issue of fact. On the other hand, if the court hit it on the spot in In Print, Medical Books Inc. v. Harcourt, Inc., the payment of commissions would not necessarily create exclusivity as the principal acted consistently with its right to sell directly, which is the essence of non-exclusivity. In other words, paying commissions does not indicate the principal's intent to renounce its right to sell directly. By the same token, there is an equally permissible inference from the one drawn by the Kellogg court that the distributor waives its claim of de facto exclusivity by permitting others to sell directly even when accepting the payment of commissions. Unless, of course, in that case the principal clearly has manifested its intent to agree to pay commissions in recognition of the distributor’s exclusive rights.

Amendments to the Rules of Evidence of Puerto Rico may become outcome-determinative with respect to the admissibility and weight of expert testimony in commercial litigation, including Law 75 cases.

For those who think that a local court in Puerto Rico is necessarily more favorable to a principal in Law 75 cases simply because there is no right to trial by jury, think again, after the recent amendments to the Rules of Evidence of Puerto Rico.

The Amendments conform to the structure and numbering of the Federal Rules of Evidence, but some of the changes are substantively far-reaching. One of those changes turns on the admissibility and weight of expert testimony. Significantly, the Puerto Rico evidentiary rules on expert testimony, as amended, depart from Daubert and progeny, norms that set the standards for the court’s gate-keeping role for the admission of reliable expert testimony. Instead, the Rules rely on Puerto Rico Supreme Court precedent which seems to be inclined to admit expert testimony, even if unreliable or untested, and leaves to the trier of fact to give the weight to that evidence as it deems appropriate. While the point is not free of debate, precedent in Puerto Rico seems to prefer admitting rather than summarily excluding expert testimony.

Not adhering to Daubert and progeny could have significant repercussions in commercial cases especially those that require expert testimony. One effect may well be that the local court would be less inclined to grant a motion in limine to exclude or limit unreliable expert testimony on the issue of damages. Law 75 cases almost always require expert testimony on the computation of damages. Thus, expert testimony may get admitted, and depending on the weight of all the other evidence, it may be more difficult to set aside a Judgment as clearly erroneous when the error has been that the court gave improper or undue due weight to expert testimony or where the determination turns on the credibility of one expert over the other.

So, if you are a distributor or a principal in a Law 75 case, where would you rather be if you had an opportunity to decide what forum to litigate in? It seems that the amendments of the Puerto Rico Rules of Evidence add another factor to the mix.