This topic continues to be one of the “hottest” or most current in distribution law practice in Puerto Rico.
For many years, retailers in Puerto Rico have been aggressive to improve their margins by using whatever leverage and buying power they may have to demand that suppliers, including Puerto Rico distributors, lower their wholesale prices of groceries and provisions. With the entry of national accounts and clubs, such as Wal-Mart (Sam’s), Costco, and Walgreens, the retail market of groceries and provisions in Puerto Rico has become more competitive in terms of price, quality and services. The consumers' demand for produce and other commodities is price sensitive (elastic) so that the national accounts or clubs- and the Puerto Rico retailers that compete with them- make purchases either from Puerto Rico distributors that have exclusive agreements or from other sources of supply that claim to offer the same products at the best possible prices but without providing any value-added services.
It is widely known that some of these national accounts or clubs purchase brand-name products that have exclusive distribution contracts with Puerto Rico distributors from suppliers or wholesalers directly in the continental U.S. for resale not only to customers throughout the United States but to Puerto Rico.
Puerto Rico distributors that must compete in this challenging environment may opt, 1) to reduce their margins and lower their prices but continue to provide the same level of service, 2) request suppliers to pay them commissions on these direct sales and have them match the prices offered to the national accounts, and/or 3) sue to enforce their claims of exclusivity. A few Puerto Rico distributors that claim to have exclusive distribution agreements have complained that sales to national accounts or to Puerto Rico retailers constitute impairments by their suppliers in violation of Law 75 or a third-party’s tortious interference with contract.
Reported federal litigation in both Puerto Rico and New Jersey (the Twin County and Di Giorgio cases) have not slowed the tide of a new wave of claims provoked by these national accounts aggressively purchasing products at bulk in the U.S. and reselling to end-user customers at their stores in Puerto Rico. See Twin County Grocers v. Mendez, 81 F. Supp. 2d 276 (D.P.R. 1999); Di Giorgio Corp. v. Mendez & Co. Inc., 230 F.Supp.2d 552 (D.N.J. 2002); see also Sterling Merchandising v. Nestle, 546 F.Supp.2d 1 (D.P.R. 2008)(dismissing tortious interference counterclaim from sales first made outside Puerto Rico);compare Eliane Exportadora v. Maderas Alfa Inc., 2007 WL 2585173 (TCA 2007)(verbal exclusive distribution agreement and course of conduct as the sole distributor of branded ceramic products impaired and constructively terminated without just cause in violation of Law 75 caused by supplier’s sales to Home Depot and other distributors).
There is a common thread of legal issues arising in all these cases, including in one of the most recent cases, Medina & Medina Inc. v. Hormel Foods Corporation, No. 09-1098 (JAG) pending in the U.S. District Court for the District of Puerto Rico. Those issues are: first, does an exclusive distribution agreement in fact exist; second, if so, is the agreement “airtight” in the sense that the contracting parties intended to prevent all intrabrand competition?; third, is the exclusive agreement confirmed or refuted in writing or by the course of performance of the parties; fourth, is Puerto Rico law being applied extra-territorially affecting sales made outside Puerto Rico to raise any concerns under the Dormant Commerce Clause or federal antitrust laws?; fifth, are those impairment claims time-barred under Law 75’s three-year caducity period or the Civil Code’s one-year limitations period for tort claims?; and sixth, does federal intellectual property law preempt Puerto Rico Law 75 in these circumstances? Finally, should some of these issues be certified to the Supreme Court of Puerto Rico?
With a stagnant economy and price competition as aggressive as ever, we can expect more litigation in the near future of this type of claims brought under Law 75 and the Civil Code. Where timely legal advice is sought by the supplier or the distributor, “preventive medicine” may help to minimize the risk of litigation.
Where there is no choice but to litigate, courts should definitively put to rest once and for all the legal issues that can be decided conclusively and do not depend for their resolution on the facts and circumstances of each case.