Sunday, August 29, 2010

Appeals Court affirms judgment under Law 75 awarding damages for five-years of lost benefits and goodwill to exclusive distributor for constructive termination or impairment.

Appellate court decisions in Puerto Rico are persuasive authority in the application and interpretation of Law 75. One such case is Cadierno Corporation v. Rowland Coffee Roasters, 2010 WL 3168203 (TCA April 30, 2010) where plaintiff Cadierno, an exclusive distributor of branded Café Estrella premium coffee, brought a claim for damages under Law 75 against its principal Rowland when the latter introduced Café Pilon, an essentially identical branded premium coffee, through a subsidiary at prices below the distributor’s costs. The distributor opened the market and clientele for Café Estrella, as the exclusive distributor, with the expectation that, once a controversy as to the ownership of the Café Pilon brand was resolved, it would also distribute Café Pilon in Puerto Rico. The parties negotiated the exclusive distribution of Café Pilon, but did not reach an agreement. After Rowland introduced Café Pilon in Puerto Rico through a subsidiary at predatory prices, the distributor decided to discontinue purchases of Café Estrella for it alleged that it was driven out of the market and sales of Café Pilon has in effect cannibalized sales of Café Estrella.

Claiming that the principal’s acts impaired and terminated the exclusive relationship by appropriating the goodwill and clientele created for Café Estrella, the distributor sued in local court under Law 75. After trial, the local court (Bayamon Part) found in favor of the distributor, credited the testimony of the distributor’s expert (Ronald Martinez), and awarded damages for lost benefits, loss of goodwill, attorney’s fees and costs.

Interestingly, the distributor’s expert computed lost benefits from the impairment based on the criteria normally used in termination cases under Section 278c, by computing profits on the line for the prior five years and discounting, as mitigation, the profits realized on sales of Café Estrella until the distributor abandoned the line.

The principal challenged on appeal the sufficiency of the evidence of impairment and constructive termination; the finding of lack of just cause; the determination of damages from the trial court’s decision not to impute fixed and administrative costs from the award of damages; the finding of loss of goodwill; finally, it contested the imposition of attorney’s fees, expert witness fees and costs.

The principal lost as the appellate court affirmed the judgment on all counts. The court held that the decision to introduce Café Pilon, a premium coffee that was substantially the same as Café Estrella, through a subsidiary at prices below the distributor’s costs impaired the exclusive contract over Café Estrella and caused damages to the distributor in violation of both Law 75 and the principle of good faith and fair dealing.

Note: Cadierno reinforces Law 75’s remedial purpose when the principal seeks to appropriate the clientele and goodwill created by the exclusive distributor by introducing a new brand or product line extension through a third party or an affiliate. It is even more significant considering that the distributor abandoned the line voluntarily and was not terminated in fact by the principal. It should be noted that Cadierno finds an impairment of an exclusive contract although the parties had not reached an agreement over the new brand or product line extension. The impairment with the exclusivity over Café Estrella came about because of cannibalism that resulted when the principal introduced Café Pilon to compete and displace Café Estrella in the territory. Finally, Cadierno validates the distributor’s expert’s methodology that five-years of benefits are not limited to termination cases.