Thursday, October 31, 2013

A much-awaited federal decision provides some clarity about the scope of exclusive distribution rights under Law 75 over sales of new products and products in different packages to retail club channels

In Medina & Medina, Inc. v. Hormel Foods Corporation, No. 09-1098 (JAG)(Sept. 30, 2013)(Docket Doc. No. 170), the federal district court (Garcia-Gregory, J.) held a bench trial over the distributor Medina’s Law 75 claims that the principal Hormel had impaired an exclusive distribution relationship. There was no written agreement spanning a “twilight zone-absent clear parameters” of a 20-year business relationship; the distributor claimed to be exclusive for product line extensions (the Supreme Party Platter) of refrigerated products sold to clubs (Costco); the principal had been selling products to mainland distributors for over 20 years who resell into Puerto Rico; and the principal denied any exclusive arrangement with Medina. The “Supreme Party platter” is an array of Hormel-branded concoctions including “all-natural meats” and cheeses and is a larger display than the original party platters that the Puerto Rican distributor had sold to Costco. Medina had been the only distributor of new products introduced by Hormel in Puerto Rico.

In a 45-page thoughtful opinion, the court found for the distributor and for the supplier, in part. A detailed narrative of all the relevant facts is beyond our scope, but suggested reading in the opinion. “The Court finds, after preceding over the bench trial and examining the issues as framed by the parties, the following controversies pending: (1) whether Medina is Hormel’s exclusive distributor for the Commonwealth of Puerto Rico for the Hormel retail refrigerated products and fresh pork and, if that is true, whether Hormel is precluded from selling to other mainland distributors who then resell any of those products in Puerto Rico; (2) whether Hormel’s sales to Costco of the Supreme Party Platter impaired Medina and Hormel’s relationship; (3) whether Hormel impaired the distribution relationship by refusing to sell the new refrigerated retail products to Medina in 2009; and finally, (4) whether Hormel is obligated to sell to Medina all new retail products it introduces into the market.”

Exclusivity over retail refrigerated products:

At the outset and consistent with federal case law, the court approved the use of oral testimony and the course of dealings of the commercial practice between the parties to establish the existence of an exclusive relationship- absent a written agreement. The court rejected Hormel’s argument that the Commerce Code requires written corroboration to prove exclusivity.

Most significantly, the court dismissed Medina’s exclusivity claim over retail refrigerated products on caducity grounds. Medina had started complaining on or before 2005 about mainland distributors selling Hormel products to Puerto Rican retailers in breach of its alleged exclusive rights. Relying on the First Circuit’s Basic Controlex decision, the court held that the three-year caducity period in Law 75 started to run from notice of Hormel’s first denial of exclusivity in 2006 and this precluded any claims from subsequent sales and continuing violations. The suit filed in 2009 was time-barred. “[D]istributors are forced to fiercely prosecute breaches to its [sic] exclusivity or risk losing exclusivity forever”, said the court. As part of its rationale, the court noted that selling to stateside distributors would be the kind of detrimental act triggering the limitations period, adopting Gussco’s definition of exclusivity in the context of antitrust law: that is, “a mechanism by which a supplier agrees to sell its products for resale to a single distributor in a given region. This implies not authorizing other distributors for the same area.” The court held that, because the exclusivity claim is time-barred, Medina was not Hormel’s exclusive distributor and therefore, lost all the exclusive rights it claims to have had.

The court’s adoption of Gussco’s definition and the implication that sales to stateside distributors could impair exclusive rights could prove to be a gold nugget for distributors, though Medina lost on caducity grounds.

Supreme Party Platter sales to Costco:

Hormel did not dispute that Medina has been its sole distributor based in Puerto Rico. Although the court made no distinctions between marketing concepts involving line and brand extensions, the issue here was whether the distributor has a right to sell the same brand and type of products when marketed and sold in a different package.

This claim did not hinge on proof of exclusivity, but rather, involved a product line of party platters that had been introduced and developed by Medina for Costco. The court noted that Law 75 intends to proscribe this type of situation where the supplier takes advantage and leaves the distributor stranded after the dealer has created a market and a clientele for the principal’s products. The court found irrelevant that Hormel had not developed the Supreme Party platter line specifically for Costco in Puerto Rico. “The Court finds that Hormel, under its agreement with Medina, was bound to protect its distributor, and sell through Medina the upgraded version of a product for which Medina had developed the market.” An offer by Hormel to pay commissions, held the court, would neither release Hormel from its legal obligation nor cure Hormel’s violation of Law 75 from sales of the platter line to Costco. The court found Hormel liable under Law 75. The case had been bifurcated so that the court did not decide the damages issues.

New products:

The court found that Hormel had refused to introduce any new products into the market. The court held that Law 75 does not contemplate and Medina cannot dictate “whether a particular product will enter the Puerto Rico market”, citing the First Circuit’s earlier Medina decision. Medina produced no evidence that Hormel was contractually obligated to sell any new products to it and the court dismissed that claim, citing the First Circuit’s Vulcan Tools case. Simply because Hormel, for some years, had in the past sold new products to Medina, does not mean that it is contractually obligated to continue to do so. “The court finds that Hormel is not obligated to introduce new retail refrigerated products to Medina once it decides to enter the Puerto Rico market.”

Author’s Note: I find it hard to reconcile the holding that Hormel violates Law 75 because Medina developed the party platter line to Costco and has a right to distribute the "enhanced" "Supreme" party platter line from the separate holding that Medina has no right to "new" refrigerated retail products- though it distributed many new products over the years- because Hormel was not contractually "obligated" to introduce or grant any additional new products. The fine point may be that, although Costco's Supreme platter is a “new” form of packaging it is the same brand of products; Medina developed it and Hormel is obligated for that “enhanced line” only. According to the court, this should not mean that Medina has a right to brand or line extensions or to new products of the same brand, absent contractual rights.