Tuesday, July 9, 2019
Can a Puerto Rico corporation state a claim for Law 75 damages when it did not make a profit or loss on the sale of the relevant products, but a non-party related corporation did?
Heartland acquired the assets worldwide of the Splenda-branded sweetener from Johnson & Johnson in an asset purchase agreement (APA). Puerto Rico Supplies had been J&J’s distributor for Splenda and other consumer products in Puerto Rico. After the APA, Heartland considered various distribution alternatives and selected Plaza Provisions, its long-standing Puerto Rico distributor, for the new Splenda product line. After Puerto Rico Supplies wrote to Heartland claiming that it had become J&J’s successor and was bound to assume its prior relationship with J&J, Heartland filed a declaratory judgment action in federal court alleging, among other things, that it never conducted any business with Puerto Rico Supplies and it was not J&J’s successor under the APA. Puerto Rico Supplies counterclaimed for Law 75 termination damages and raised a bad faith claim under Article 1802 of the Civil Code. Puerto Rico Supplies decided not to sue J&J with whom it continued to have a business relationship for non-Splenda products. Heartland v. Puerto Rico Supplies Group, Inc., 2017 WL 432694 (D.P.R. 2017) (denying Heartland's motion to dismiss alleging that Johnson & Johnson was an indispensable party) provides an overview of the factual background prior to the summary judgment motion.
Discovery revealed that Puerto Rico Supplies, during the five-year period prior to the APA, had purchased Splenda and other products from J&J without a written agreement and transferred the Splenda inventory at cost to a non-party Premium Brands, Inc., an entity related to it by common ownership. It was Premium Brands the corporation that sold and distributed Splenda to customers in Puerto Rico and reported a gain or loss on those sales in its audited financial statements and tax returns. Both corporations operated for tax purposes as a pass through to reduce the tax liability of its owner. Mid-litigation, the two corporations merged and Puerto Rico Supplies became the sole surviving entity.
Heartland moved for summary judgment arguing, among other things, that the Law 75 claim had to be dismissed for lack of damages, an essential element of the claim. Heartland argued that First Circuit precedent in the Unilever case holds that the assets of separate corporations are distinct including the value of distribution contracts, and an affiliated corporation is not a party to an agreement under Law 75 simply because of its relationship to the signatory. Under this rationale, Puerto Rico Supplies, argued Heartland, suffered no damages under Law 75 because it transferred the Splenda inventory at cost and did not report a profit on any sales. Puerto Rico Supplies responded that for equitable reasons it should be allowed to reverse-pierce the veils of the corporations and treat both as one for Law 75 purposes. Puerto Rico Supplies also argued that both corporations functioned as a single entity with Premium Brands operating as a sales arm or division. Heartland countered that neither Puerto Rico nor Delaware law recognized standing to a corporate insider to reverse-pierce a corporate veil to state a claim to derive a financial or economic benefit and that the corporate separation of each had to be respected.
The issue was fully briefed on summary judgment but remained undecided by the pretrial conference.
The undersigned was lead counsel for Heartland in the case with CAB's Carla Loubriel and Diana Perez joining as attorneys of record.