Wednesday, May 12, 2010

An “epic battle” over exclusive distribution rights under Law 75 comes to a close with a stalemate: the Kellogg and B. Fernandez dispute.

The dispute generated no less than multiple published cases in the federal court in Puerto Rico, two appeals on jurisdictional issues in the U.S. Court of Appeals for the First Circuit, and related litigation in Michigan state court. The matter came to a head in B. Fernandez v. Kellogg USA, 2010 WL 376326 (Jan. 27, 2010 D.P.R.)(Gelpi, J.) where on the eve of trial the court granted and denied in part Kellogg’s motion for summary judgment and denied B. Fernandez’ motion for summary judgment. It should be disclosed to our readers that I was lead counsel for Kellogg in those cases.

Since the mid 1900’s, B. Fernandez had been, and still is, a distributor of Kellogg cereals in Puerto Rico. Since the 1960’s up to 1992, written agreements defined the commercial relationships between the parties. All the written agreements were non-exclusive. In 1992, the last written contract expired on its own terms without it being renewed or replaced by a new agreement. The relationship continued on the same terms and conditions, except that in 2003 Kellogg paid commissions to B. Fernandez for direct sales of certain Kellogg cereal products and the parties made other changes in their business dealings. B. Fernandez alleged that the relationship after 1992 became de facto exclusive as recognized by the absence of competing distributors and the payment of commissions. In 2004, B. Fernandez transferred title over the inventory of Kellogg cereals to the Puerto Rican Kellogg affiliate. The inventory repurchase agreement expressly ratified the continued validity of the non-exclusive 1992 agreement. As part of that transaction, Kellogg USA, the principal in the distribution relationship, assigned the 1992 agreement to Kellogg Caribe.

B. Fernandez filed suit claiming an impairment of exclusive rights in violation of Law 75 and fraudulent inducement of the inventory contract when Kellogg started to sell certain cereal products directly in Puerto Rico. Kellogg moved for summary judgment claiming that Law 75 did not apply retroactively to the relationship that began decades before the enactment of Law 75 in 1964, there was no extinctive novation, and there was no legal basis for a claim of fraudulent inducement. B. Fernandez moved for summary judgment for the court to declare that the relationship was exclusive.

After 15 rounds of fierce litigation, the court declared a draw. The court dismissed the fraudulent inducement claim finding it hard to believe that B. Fernandez, a sophisticated business entity assisted by counsel, could allege to have been misled into transferring the inventory. As to whether Law 75 applied or not, the issue became more complex. First, the court determined that there was a factual dispute concerning the validity of the assignment of rights in the inventory contract. Thus, the court could not give conclusive effect, without a trial, as to the representation in the inventory agreement ratifying the non-exclusive agreement of 1992 (and this would have been proof that no extinctive novation occurred). The court then concluded that it could not determine summarily that Law 75 did not apply because there was a factual dispute as to extinctive novation. Finally, the court determined that whether or not on these facts the relationship was exclusive was a triable issue for the jury. In a separate opinion, the court dismissed a Law 75 claim by CWL, an affiliate of B. Fernandez and logistics provider, for it did not qualify for protection as a dealer under Law 75 and the relationship without a fixed term was terminable at will.