Is the floodgate open? McDonald Corporation’s disgruntled retail franchisees in Puerto Rico find coverage under Law 75

In a case with potentially far-reaching implications in the food services retail industry, the Court of Appeals, San Juan Division in AA& S Food Service Corp. v. McDonald’s Corporation, 2012 WL 2577784 (TCA, May 12, 2012), denied a petition for certiorari to vacate the lower court’s adoption of a report by a Special Commissioner (Angel Rossy, Esq.) that certain McDonald’s franchisees are protected by Law 75. According to the court’s opinion, the complaint alleges that defendants intend to impair and terminate the established dealer relationships and appropriate the goodwill by requiring the franchisees to invest significant amounts of money to remodel stores and then force the franchisees to sell their franchise rights. In response to the franchisees’ motion for preliminary injunctive relief, McDonald’s moved to dismiss arguing that the franchise agreements were not distribution contracts within the meaning of Law 75. McDonald’s main argument was that the franchising contracts are atypical and resemble the franchise agreement in the Supreme Court’s Martin BBQ case which, according to McDonald’s counsel, was outside the scope of Law 75. Applying the traditional factors in Lorenzana to determine who qualifies for Law 75 protection, the appellate court determined that the lower court was not arbitrary and capricious in adopting the report which found that the franchisees complied with most of the factors for Law 75 coverage, such as taking risks in signing the franchising agreements, investing in advertising and promotion, assuming the costs and responsibility of maintaining an inventory, and complying with standards of quality required by the franchisor. Author’s Note: Why did the Court of Appeals need to explain its reasons to deny certiorari, aside from maximizing the possibility of a denial of certiorari by the Supreme Court? It can hardly be said that the decision denying certiorari would be precedent in similar cases. The court’s reasoning could be criticized as dictum or as an advisory opinion. Be that as it may, the case may open the door to a potential class of Law 75 plaintiffs- including hundreds of retailers, franchisees, and mom and pop stores that resell products to the ultimate consumer. To me, the focus is not whether franchisees are excluded from Law 75 coverage as a matter of law- a proposition doubtful at best given Law 75’s broad definitions of “distributor” and “dealer’s contract” in §278(a)(b) to include a “franchise” … “on the market of Puerto Rico.” Rather, the opinion begs the threshold question whether retail franchisees have standing under Law 75 to claim the misappropriation of goodwill when the franchisor is the owner of its trademarks and associated goodwill developed from its investments worldwide in advertising and publicity. At least one federal case, Carana v. Jovani, 2009 WL 1299569 (D.P.R. 2009), held that Law 75 does not contemplate such recovery when the retailer free rides on the goodwill and clientele created by the franchisor of a famous or recognized brand.

Should an exclusive distributorship be implied from the supplier’s silence? Not according to a panel of the local appellate court.

In Next Step Medical Co. Inc. v. Bromedicon, Inc., 2012 WL 2399503 (TCA San Juan, May 23, 2012)(Dominguez-Irizarry, J.), the plaintiff-distributor filed suit for preliminary injunctive relief and damages under Law 75 in the Court of First Instance, San Juan Part, alleging an impairment with an alleged exclusive relationship for the distribution and servicing of medical products in Puerto Rico. The facts are somewhat unusual, but crucial for the court’s conclusion that there was no meeting of the minds over exclusivity. The parties exchanged and amended two drafts of an exclusive distribution agreement. The distributor signed and delivered the last draft to the supplier’s principal who never signed it. Subsequently, the parties met to discuss contractual expectations and differences of opinion arose as to whether the supplier would be bound by a purported obligation not to offer competing products for the services required by the distributor. At no time during those meetings did the distributor allege the existence of an exclusive relationship. Nor was an exclusive agreement ever signed. The distributor filed suit when the supplier began to offer the same medical services through other entities. The standards for preliminary injunctions in Law 75 cases are straightforward and addressed at length in the appellate court’s opinion. The appellate court affirmed the trial court’s denial of preliminary injunctive relief reasoning that the distributor had failed to establish irreparable harm as there was no evidence of actual damages and the sales of the line at issue were small when compared to total company sales; the distributor had failed to show convincingly the existence of an exclusive dealership necessary to prove likelihood of success on the merits; the allegation of harm to reputation was not substantiated and it incurred in laches. The court in effect affirmed the judgment by denying the petition for certiorari.