Foodservice distributor loses Law 75 preliminary injunction and tests the boundaries of just cause from a brand consolidation in a case with unusual facts

A ruling on a preliminary injunction is not an adjudication on the merits but a preview of what the merits might bring. José Santiago v. Smithfield Packaged Meats, 66 F. 4th 329 (1st Cir. 2023), is significant for it tests the boundaries of the meaning of just cause from acts or omissions that are not attributable to the dealer. Specifically, when is it just cause for the principal to terminate a dealer’s contract after a bona fide impasse on the essential terms of the distribution relationship? There is a long line of cases on this subject but none on the facts squarely presented here. Santiago is Puerto Rico’s largest foodservice distributor with over $300 million in sales. It had a written exclusive contract for the sale and distribution of packaged meat products marketed and branded under the Farmland label. Smithfield acquired Farmland and merged into Smithfield as the surviving entity. Smithfield had appointed Ballester, another Puerto Rico distributor, for its Smithfield branded meat products. Some of the products that Ballester sold were rebranded Farmland products. Smithfield embarked on a “global SKU rationalization process” with the goal of consolidating brands and reducing product redundancies. Smithfield decided that all products would be marketed solely under the Smithfield brand. Smithfield offered Santiago to continue its exclusive distribution over Farmland until it was withdrawn. Importantly, Smithfield offered both distributors a non-exclusive relationship over the new Smithfield re-branded product lines. Smithfield later offered Santiago exclusivity over seven products that had been carved out from Ballester’s contract, but Santiago refused for it wanted exclusivity over the entire portfolio of 40 products. After an impasse, Smithfield terminated the relationship. The First Circuit disagreed with the District Court’s reasoning on two of three grounds for its denial of the injunction, but it affirmed. First, the court rejected Smithfield’s argument that Santiago had no protected dealer’s contract. It was counterintuitive said the court that, if Santiago performed the statutory functions of a dealer, it would not qualify as such because the parties did not execute the non-exclusive dealer’s contract for the products it continued to sell and distribute after the consolidation. Second, the court rejected Smithfield’s argument that its affirmative consent was essential for a finding of exclusivity from a course of dealings. “Smithfield claims to have continued filling JSI’s orders since February 2021 only “out of courtesy” and in hopes of eventually reaching an agreement. But Smithfield points to no evidence showing that it ever communicated to JSI that it was filling orders out of courtesy on an order-by-order basis, rather than as a continuation of the parties’ longstanding relationship. The parties’ course of dealing is to be defined by their observable behavior, rather than any subjective, unexpressed intent that one of them claims to have had. (citations omitted). And the evidence in the record strongly suggests that Smithfield continued filling JSI’s orders after February 2021 in the exact same manner as it had done before.” Finally, and key to its holding, following the long line of Medina and V. Suarez line of cases, the court affirmed because it held that the supplier had just cause for termination after a bona fide impasse following the consolidation and Santiago’s rejection of a non-exclusive agreement. Santiago’s exclusivity pretensions were unreasonable because the supplier had two distributors in P.R. for competing product lines and granting exclusivity to one over the other would disrupt the established relationships. Importantly, there was no evidence that the consolidation and the termination were done to appropriate the goodwill created by Santiago for the Farmland product line or was otherwise an arbitrary or bad faith decision. “To hold otherwise would be to render perfectly legal corporate and brand consolidations unduly problematic. Here, for example, two distributors apparently each enjoyed distributing similar products under different brands (and at least JSI did so exclusively). Following the brand consolidation, something had to give: Both distributors could not have conflicting rights over the same products. So unless we are to read Law 75 as precluding good-faith brand consolidations, we must conclude that the law allowed Smithfield to attempt to reallocate distribution rights in a manner that acknowledged the interests of both its distributors and its own legitimate interest in making its products available in Puerto Rico. Cf. Borg Warner, Official Translation at 23–24.” The court also discussed other grounds asserted for just cause, such as the timeliness of payments, and the criteria for injunctive relief in Law 75 cases, that are important to consider. In my view, the First Circuit’s opinion on the dealer’s exclusivity derived from its course of dealings implicitly revokes a rationale in Ramos v. Willert Home Products, 2023 WL 234758 (D.P.R. 2023)(Arias, J.), the case I blogged about recently, holding that exclusivity can only arise if the principal affirmatively consents to it. Rather, what counts are the terms of the written contract and the behavior of the parties consistent with exclusivity in performing with or without a written contract. The court’s main holding of just cause from a brand consolidation is both fact-intensive and not susceptible to bright-line rules. For Santiago in this case, losing the injunction is the result of a bad set of facts or aggressive business decisions coupled with the supplier’s business acumen and well-researched legal strategy.