De facto exclusive is not what you think it means and there’s a new but not true intra-district conflict

Willert is a manufacturer of household products. In Ramos v. Willert Home Products, 2023 WL 234758 (D.P.R. 2023) (Arias, J.), Plaintiff claimed that, for “over 40 years,” it served as Willert’s exclusive distributor in Puerto Rico and the Dominican Republic. In 2011, Plaintiff delegated some of the distributor’s functions or obligations to another distributor (PRSG) in a contract where the latter assumed distribution responsibilities over the Willert line. Plaintiff retained sales responsibilities and received from Willert commissions on sales. In 2021, Willert notified that it would be unilaterally terminating all sales representation agreements as part of a global business strategy. Plaintiff filed a federal suit claiming damages for termination and impairment of a sales representation agreement under both Law 21 and the Civil Code for breach of contract. Two facts or business decisions would prove fatal to Plaintiff’s case under Law 21. First, the business relationship, if it started in the 1970’s predated the enactment of Law 21, but not Law 75. Second, and possibly more important, Plaintiff’s delegation of its distribution obligations to PRSG meant that it would have had no basis to state a Law 75 claim from the termination. Plaintiff, in effect, ceased being a Law 75 dealer and morphed as a sales representative. Because Law 21 does not apply to the relationship established with Willert before its enactment in 1990, Plaintiff ran out of luck. Whether Plaintiff calculated the risks of losing any protection from Puerto Rico’s relationship laws that the delegation would have is unknown. It all went predictably downhill from there. The court held that Plaintiff could not state an actionable Law 21 claim because the statute does not apply retroactively. That should have been enough to dismiss the case under Rule 12(b)(6) but in dicta the court went further. Applying settled law, the court held that Puerto Rico law does not apply extraterritorially to provide a damages remedy for sales within the Dominican Republic. And, the district court readily dismissed the breach claim under the Civil Code for the contract was terminable at will. As the final dagger in the distributor’s heart, and breaking stride with the Homedical v. Sarns, 875 F. Supp. 947 (D.P.R. 1995) line of cases, Judge Raul Arias in dicta determined that the complaint also failed to plead the elements of exclusivity required by Puerto Rico Law 21. The complaint failed to allege an exclusivity contract, or an exclusive arrangement agreed by the parties. This was unncessary to the court's decision since it held that Law 21 did not apply to the agreement. It is insufficient, says the court, to conclusorily allege a de facto exclusive relationship even over decades without ostensible facts proving that the principal consented or acquiesced to it. Those overt intentional acts (not pleaded in the complaint) tending to show an exclusive course of dealings would include the supplier’s communications recognizing exclusive rights or refraining from selling product to other distributors, among others. The court relied on IOM Corp. v. Brown Forman, 627 F. 3d 440 (1st Cir. 2010), but it seems distinguishable. In IOM the parties had executed a written and integrated non-exclusive agreement, so proving exclusivity from a course of dealings was legally problematic. What is remarkable is the notion that an exclusive course of dealings over decades without an integrated and complete written agreement as in this case would apparently not be, by itself, enough to survive a motion to dismiss. The court's rationale about the meaning of exclusivity reflects viewing exclusivity as a restriction on the principal’s autonomy as opposed to a right or legitimate expectation derived by the distributor from a continuous course of dealings. The court prioritizes the principal's expectations over the distributor's to give no credence to the alleged course of dealings at the pleading stage. But the court’s rationale ignores the commercial reality that principals derive benefits and tangible value from a sole distributor’s investments and efforts acting as if the relationship was in fact exclusive and there would be no intrabrand competition. The court’s decision conflicts with Homedical (among others), a Law 75 case decided on summary judgment with a developed record but importantly where the principal never acknowledged plaintiff’s exclusivity despite years of an exclusive course of dealings. Judge Arias' ruling might spill over in Law 75 litigation in the months and years ahead.