Non-exclusive distributor loses preliminary injunction in federal court

Update: No. 22-1491 Argued on November 9, 2022 in the First Circuit. Appeal from an order denying a preliminary injunction. Stay tuned for a ruling. José Santiago, the largest foodservice distributor in Puerto Rico, requested a preliminary injunction under Law 75 to continue an unwritten, nonexclusive distribution contract. In José Santiago, Inc. v. Smithfield Foods, Inc., 2022 WL 2155023 (D.P.R. 2022)(Carreno, J.) the district court would not oblige. In sum, Santiago could not prove that it had exclusive distribution rights over the Smithfield product line of meats in question and was behind in its payments. Santiago was an exclusive distributor but for a different product line of the supplier’s predecessor. Santiago had an exclusive distributor agreement for Farmland, not Smithfield products, with the supplier’s predecessor. Farmland merged into an entity within the Smithfield corporate umbrella. Things went south when Smithfield informed Santiago that it intended to consolidate the brands. Under this new arrangement, Santiago would remain as the exclusive distributor for Farmland products. But, as to Smithfield, another distributor- Ballester- would continue to serve as the exclusive distributor for Smithfield. Significantly, Santiago had never been a distributor of the Smithfield product line before the consolidation. Things went even deeper south, when Smithfield later sent a notice that it was reducing its brand offerings and Farmland would be consolidated into the Smithfield brand. Santiago aspired that it would become an exclusive distributor for Smithfield products. Smithfield responded by offering Santiago a non-exclusive distributor agreement for some Smithfield products. Ballester and Santiago would remain as before the two Puerto Rico distributors for the consolidated Smithfield and Farmland lines. From going south, things reached the Antarctic. In December 2020, Smithfield sent Santiago a notice of termination of the exclusive distribution contract. Since then, Smithfield continued to supply Santiago with both Farmland and certain Smithfield products pending reaching a non-exclusive agreement. Santiago claims that Smithfield would refuse to sell unless it agreed to the non-exclusive contract. The problem for Santiago was not the law but the facts, as the court noted, that would become dispositive on whether to issue a preliminary injunction. Here are the bullets of the court’s decision denying injunctive relief. First, the court cautioned that a ruling on the injunction was not an adjudication on the merits. True as far as that goes. But once any party loses a preliminary injunction there’s a either a sweet smell of roses for the winner or a foul stench for the loser as the case moves forward on the merits. Here it was the latter. Second, the court was right that Law 75 contractual obligations need not be reduced to writing. It ruled that especially when there is no written contract the court looks to the parties’ course of dealings to discern the terms of the agreement. Citing Medina & Medina, it is not only where there is no written contract that course of dealings evidence is relevant, but the entire course of dealings is helpful to understand the business relationship and how the parties performed their obligations. Third, the court ruled that in this diversity case Puerto Rico substantive law applies to the preliminary injunction analysis. The common law (and federal standards) of irreparable injury and likelihood of success are not obligatory under Law 75, but can inform the analysis of how the court views the interests of the parties and the public policy interests at stake. Fourth, Santiago qualified as a Law 75 dealer. Fifth, and touching on the merits, the court was “skeptical”, but did not decide the question, whether Santiago had any contractual rights from Smithfield’s refusal to fill orders. Sixth, especially in the absence of a written contract, the court found no “pattern or consistency” that could be discerned from the course of dealings that would vest Santiago with rights over the Smithfield line. The problem for Santiago was that Ballester had been the only distributor of the Smithfield line before the consolidation. However, the problem that I see with the court’s analysis, from an omission in its discussion, is that Santiago did have exclusive contractual rights over Farmland products before the consolidation. The inference would have to be that Farmland was in effect completely withdrawn from the market after the consolidation with Smithfield, so that the refusal to sell were only over Santiago’s p.o’s for Smithfield that it had been selling on a non-exclusive basis without a contract. Seventh, and the final dagger in the heart, was that Santiago was behind in its payments and Smithfield was not shown to have a history of tolerating late payments. Smithfield refused to fill orders until and if Santiago became current. The court was leaning to find just cause for termination. Finally, the court found that Smithfield would also have just cause for termination after reaching a bona fide impasse in its contractual obligations, citing RW Welch. The court applied the rule existing in the context of market withdrawals. “We have seen no evidence that Smithfield’s decisions to consolidate its brands, do away with Farmland, and offer Santiago a written non-exclusive distribution contract are unreasonable or in bad faith.” The short of it was that Santiago could not aspire to have exclusivity which it never had by contract or from a course of dealings.