Say Cheese: is written corroboration needed for exclusivity?

In Distribuidora VW, Inc. v. Old Fashioned, Inc., 2014 WL 1309955 (D.P.R. March 31, 2014)(J, García-Gregory), plaintiff, a Puerto Rican cheese distributor, sued the defendant-principal, a Wisconsin cheese manufacturer, claiming improper termination of their 10 year-old relationship under the sales representative Law 21 and for breach of contract. The distributor had continued without a written agreement the business relationship that existed between the prior distributor and the manufacturer.

Defendant moved for summary judgment arguing that plaintiff could not prove exclusivity, an essential element of a Law 21 claim. Defendant’s primary argument was that the First Circuit’s decision in Garita Hotel v. Ponce Federal, 122 F. 3d. 88, 89 (1st Cir. 1997) compelled the conclusion that the Commerce Code required written corroboration of all the essential elements of a contract and there was no evidence to corroborate a written exclusivity appointment. Not so fast, retorted the District Court. Garita is “wrong”. Why? For one thing, according to the Commerce Code, commercial contracts are valid and binding regardless of “the form”, but the “testimony of witnesses shall not in itself be sufficient” to prove the existence of “a contract” unless it concurs with other evidence. It is the existence of the contract that cannot be admitted on the basis of oral testimony alone but must concur with other evidence. Citing Vila & Hmnos, 17 P.R. Trans. 987 (1986). If you read the plain language of Article 82 of the Commerce Code this strikes me as being right; that is, unless Garita was right.

While no one appeared to dispute the existence of a sales representation agreement from a course of dealings, including business records that must have corroborated the existence of an agreement, the Commerce Code did not require written corroboration of the exclusivity element or any other essential element of that verbal contract. “In a nutshell, after a contract is proven to exist with something more than just oral testimony, the contours of the contract’s scope may be mapped with whatever admissible evidence is available.” This brave holding tests the waters of First Circuit precedent on an issue of Puerto Rico substantive law and is admittedly a significant departure from what distribution law practitioners have understood or misunderstood for over two decades.

Further, the Court noted two legal permutations of exclusivity: where the defendant agreed not to appoint another agent or sell directly in the territory or the agent agreed to sell exclusively the products of the principal and no other competing product. Because the Court found a dispute of material fact as to whether there was an exclusive contract from a course of dealings as plaintiff was de facto the only distributor, the Court denied the motion for summary judgment. The Court determined that it was for the jury to give weight to any “smoking gun evidence”, if it existed, whether the principal “made an affirmative concession of exclusivity to the representative.” Finally, the Court dismissed the breach of contract claim because there was no evidence that the contract had a definite period; thus, was terminable at will.

Has the bar been raised for a distributor to prove exclusivity?

After it had been relatively clear in the jurisprudence that the traditional requirements for preliminary injunctive relief do not apply automatically in Law 75 cases, in light of the policies served by the Act, in Next Step Medical v. Bromedicon, CC-2012-0647 (Mar. 6, 2014), the Supreme Court of Puerto Rico accepted an invitation to settle once and for all the issue of the governing standards for preliminary injunctions in Law 75 cases.

There, the distributor Next Step sold and distributed medical equipment to hospitals in Puerto Rico, including those of the principal Bromedicon, without a formal written agreement. Claiming to be the only one and the exclusive distributor of Bromedicon in Puerto Rico, Next Step filed suit for impairment of contract under Law 75 when Bromedicon began to sell its products through another distributor. At Next Step’s insistence, Bromedicon had sent a letter to the trade that Next Step was an “authorized distributor.” There was no evidence corroborating exclusivity, except for the distributor’s contention that it had been de facto over the years the sole and exclusive distributor in Puerto Rico. The Court of First Instance denied a request for a preliminary injunction and the intermediate court of appeals denied certiorari. Undeterred, the dealer appealed.

The Supreme Court affirmed the order denying the preliminary injunction. After finding that this dealer qualified for protection under Law 75, the Court held that the statutory remedy of a preliminary injunction is not automatic, but rather the analysis requires a balance of the interests of all the parties and the public policy behind Law 75. The opinion is unexceptional for the part that it reiterates precedent that the classic standards for preliminary injunctions in civil cases are treated as guidelines and this should mean that a court could grant or deny a preliminary injunction in a Law 75 case when those factors are weighed with the other factors (e.g., policies and balance of interests in Law 75). What is exceptional about the case is that, although the plaintiff fit the bill of a Law 75 dealer, it failed to prove with “clear and convincing evidence” that it was an exclusive distributor. In the end, the dealer failed to prove likelihood of success for a preliminary injunction, one of the factors deserving the most weight in ordinary civil cases, and this doomed the dealer’s case.

What can also be inferred is that, without a clear and complete written exclusive distributor agreement, a distributor relying on verbal evidence or a course of dealings of de facto exclusivity will have to prove with “clear and convincing” evidence(evidencia clara y contundente in Spanish)of the principal’s agreement to grant exclusivity. It is not enough to prove the principal’s ratification of its appointment of the dealer as an authorized distributor. More will be required.

It is open to debate if the Court intended to create a new standard for the sufficiency or weight of the evidence in Law 75 impairment cases, beyond the preponderance of the evidence, or if a new standard does apply in the context of a request for extraordinary and equitable relief and there is no conclusive evidence of an exclusive written dealer agreement. The "clear and convincing" terminology will have repercussions in pending and future Law 75 cases.