Monday, May 16, 2016

First Circuit affirms dismissal of Law 75 action as barred by the three-year limitations period

In Trafon Group, Inc. v. Butterball, LLC, 2016 WL 1732742 (1st Cir. May 2, 2016), the First Circuit affirmed both an order denying a preliminary injunction and the ensuing judgment dismissing a Law 75 action as time-barred. A Puerto Rico-based wholesale food distributor, Trafon, acquired certain assets from Packers Provisions including an existing distribution agreement with Butterball for whole bird and turkey products. The Asset Purchase Agreement (APA) did not reference an alleged exclusive distribution relationship between Packers and Butterball. Nor did Trafon secure the manufacturer’s consent or a representation of exclusivity prior to completing the asset purchase transaction. While Trafon may have believed that the distribution rights it had acquired were exclusive, Butterball disagreed and openly refuted the allegations of exclusivity in its counsel’s letter of October 2009 and in disclaimers made in each subsequent invoice. Trafon sued Butterball in September, 2013 after Butterball had made sales to Costco and refused to pay commissions on direct sales made during 2011 and 2012.

Essentially, the legal issue on appeal was when did the Law 75 claim accrue to start the running of the three-year limitations period? Did it begin to run in October 2009 when on notice of Butterball’s repudiation of the allegation of exclusivity or when it started to sell product directly in 2011? Applying Basic Controlex v. Klockner, 202 F. 3d 450 (1st Cir. 2000), the First Circuit held that the limitations period began to run from Butterball’s counsel’s letter in October, 2009 and the action filed in September, 2013 was time-barred.

At least three lessons could be learned from the facts and the court’s holding. The first and most obvious is that a proper due diligence protocol in the APA transaction should have required obtaining the manufacturer’s consent or written confirmation of an alleged existing exclusive distributorship appointment before making the purchase. The second lesson can be that clear and unequivocal notice of the supplier’s repudiation of exclusivity triggers the running of the statute of limitations and a direct sale of an exclusive product is not necessary for an impairment claim to accrue under Law 75. The third lesson may be to state the obvious: Trafon should have sued for injunctive relief earlier than it did and not wait for Butterball to commit a more costly breach.

This author was Butterball’s outside counsel before the litigation.