Another failed injunction

The streak of losses continues in federal court for distributors in their quests for preliminary injunctions pendente lite. In Nilo Watch Parts, Inc. v. Rado Watch Co., Ltd., 2023 WL 5814264 (D.P.R. Sept. 2023) (Vélez-Rivé, J.), a retail store of Rado-branded watches sued its supplier for termination of its exclusivity right established in a distribution relationship without a formal written agreement (which meant that the court had to discern the parties’ course of dealings). The principal argued that the retailer failed to grow the market for the brand and focused on lower price-point watches instead of newer models like the diver watch “Captain Cook” that had an acceptance in the United States. The dealer's years-long downward trend in sales did not help its case. Essentially, the dealer tried to control or override the supplier’s worldwide sales and marketing practices by arguing that the Puerto Rican consumer preffered cheaper watches. Although it was not discussed in the opinion, the court excluded the dealer’s proffer of expert economic testimony to prove that market or economic conditions or force majeure affected sales. It all came to naught since the court, applying the traditional criteria for injunctive relief but tailored to Law 75 cases, concluded that the dealer had not shown a likelihood of success on the merits to rebut a showing of just cause for termination of the retailer’s exclusivity. The termination was grounded on the dealer’s failure to meet Rado’s “worldwide distribution standards” governing the course of dealings, which the dealer did not contest during the hearing. And, because the dealer continues to operate and remains in business with the Swatch brand, it could not prove irreparable harm. Instead of seeking to appropriate the dealer’s creation of goodwill for Rado, Rado offered alternative terms to transition the business from distributor to retailer which showed that its business decisions were not made in bad faith or arbitrary. For other reasons too, the court denied the injunction.

Part II: The twists and turns of the new Civil Code's regulation of distribution relationships

By: Diana Pérez Seda, Esq. In a previous post we took a first close look at Chapter XV of Book Five of the New Civil Code of Puerto Rico enacted in 2020 because it includes Articles 1439-1447, which directly impact the rights and obligations of distributors and principals in a manner that demands the attention of those engaged in commercial relationships regulated by Law 75. The New Civil Code does not create new claims or causes of action. Rather, it essentially supplements and indirectly amends Law 75. Knowing all about how those articles came to be is indispensable to understanding the new scenarios principals and distributors face post-2020. Any in-depth study of a legal provision requires a detailed inspection of its text and legislative history, which includes the sequence of drafts leading up to the final approved text, the reports prepared by the various legislative commissions and any noteworthy event in the development of a legal provision. The Civil Code of 1930 was amended several times throughout the years to modify specific provisions as the needs arose. In the late nineties, Act No. 85 of August 16, 1997, was enacted to create the Joint Permanent Commission for the Revision and Reform of the Civil Code of Puerto Rico. This commission was composed of academics and practitioners of the highest caliber who worked for decades to produce multiple drafts. The New Civil Code of 2020 was, therefore, the product of thousands of hours of work by legal professionals with varied backgrounds and legal specialties. The direct legislative history of the New Civil Code reveals that the first draft was officially filed as House Bill 1654 on June 18, 2018. Interestingly, this draft did not include any of the provisions contained in Chapter XV of Book Five. Nothing in its legislative history has clued us as to why. The first time the articles are seen in the electronic file of House Bill 1654 is in the Substitute Bill of October 25, 2018, filed on January 30, 2019, which included Articles 1488-1496. A comparison shows that only one minor change is present between the Substitute Bill and the final New Civil Code. Essentially, Article 1494 of the Substitute Bill, which is equivalent to Article 1445 of the New Civil Code, had a subsection stating that the distribution contract would be deemed terminated after a bankruptcy judgment. That subsection was eliminated for the final version of the bill. Otherwise, the final version of the articles at issue was set with the Substitute Bill. It is with this Substitute Bill that the acts Exposition of Motives states for the first time that “[t]he division between civil obligations and contracts and commercial obligations and contracts is a constant source of confusion. Such a distinction lacks, for the most part, justification in today's context, as it does not lead to substantially different regulations.” It goes on to say that several different commercial contracts—including distribution—are now specifically regulated in Book Five of the Civil Code of 2020. This language, however, was taken ad verbatim from the Positive Report of the Substitute Bill of January 30, 2019. While House Bill 1654 has a specific history that began in 2018, the bill was the product of decades of work by the Joint Permanent Commission, as explained above. The articles at issue were not actually developed between the presentation of House Bill 1654 in June 2018 (where they were not present) and the Substitute Bill of October 2018 (where they appear). The articles were, in fact, present in prior drafts of the Civil Code developed by the Joint Permanent Commission for the Revision and Reform of the Civil Code of Puerto Rico. A Draft for Discussion and Explanatory Memorandum of 2004 contains the articles at issue as Articles 220-229. Some of the articles differ in significant ways from the language finally approved in 2020. For example, Article 222 of the 2004 draft stated that the “concession comprises all products manufactured or afforded by the concessionary, among which all new models are included.” The New Civil Code prefaces that same language with the caveat “unless otherwise agreed,” which is extremely significant because it recognizes that the parties may agree to exclude new models expressly from a distribution relationship. The flipside is, of course, that, unless excluded expressly, new models are automatically included within a distribution relationship. Another interesting difference is that Article 224 of the 2004 draft set a minimum of four years for distribution contracts. The New Civil code does not contain any limitation on the contract duration and does not regulate the duration. The draft is otherwise substantively very similar to the New Civil Code. A Draft for Discussion and Explanatory Memorandum of 2010 was also produced by the Joint Permanent Commission for the Revision and Reform of the Civil Code of Puerto Rico in 2010. Said draft contained the same articles at issue with the same language so nothing varied between 2004 and 2010. Both explanatory memoranda as well as the commentary to the New Civil Code note explain that the articles in question had their origin in the Draft Bill of the Civil Code of Argentina. The reason for this is that Argentina enacted a Civil Code in 2014 and during the time both the 2004 and 2010 drafts were developed by the Joint Permanent Commission for the Revision and Reform of the Civil Code of Puerto Rico academics from multiple jurisdictions in Latin America were regularly meeting at conferences and discussing and exchanging drafts. Argentina’s Civil Code of 2014 contains Articles 1502-1511 that deal with concessionaries and distributors. The 2004 and 2010 drafts of the Civil Code of Puerto Rico, as well as the New Civil Code of 2020, closely track these articles from the Civil Code of Argentina. There will certainly be future opportunities to dig deeper into the legislative history of the Civil Code of Argentina to discover the true origin of each article.