Showing posts with label Law 21; exclusivity; Law 75 contracts. Show all posts
Showing posts with label Law 21; exclusivity; Law 75 contracts. Show all posts
Saturday, April 26, 2014
Say Cheese: is written corroboration needed for exclusivity?
In Distribuidora VW, Inc. v. Old Fashioned, Inc., 2014 WL 1309955 (D.P.R. March 31, 2014)(J, García-Gregory), plaintiff, a Puerto Rican cheese distributor, sued the defendant-principal, a Wisconsin cheese manufacturer, claiming improper termination of their 10 year-old relationship under the sales representative Law 21 and for breach of contract. The distributor had continued without a written agreement the business relationship that existed between the prior distributor and the manufacturer.
Defendant moved for summary judgment arguing that plaintiff could not prove exclusivity, an essential element of a Law 21 claim. Defendant’s primary argument was that the First Circuit’s decision in Garita Hotel v. Ponce Federal, 122 F. 3d. 88, 89 (1st Cir. 1997) compelled the conclusion that the Commerce Code required written corroboration of all the essential elements of a contract and there was no evidence to corroborate a written exclusivity appointment. Not so fast, retorted the District Court. Garita is “wrong”. Why? For one thing, according to the Commerce Code, commercial contracts are valid and binding regardless of “the form”, but the “testimony of witnesses shall not in itself be sufficient” to prove the existence of “a contract” unless it concurs with other evidence. It is the existence of the contract that cannot be admitted on the basis of oral testimony alone but must concur with other evidence. Citing Vila & Hmnos, 17 P.R. Trans. 987 (1986). If you read the plain language of Article 82 of the Commerce Code this strikes me as being right; that is, unless Garita was right.
While no one appeared to dispute the existence of a sales representation agreement from a course of dealings, including business records that must have corroborated the existence of an agreement, the Commerce Code did not require written corroboration of the exclusivity element or any other essential element of that verbal contract. “In a nutshell, after a contract is proven to exist with something more than just oral testimony, the contours of the contract’s scope may be mapped with whatever admissible evidence is available.” This brave holding tests the waters of First Circuit precedent on an issue of Puerto Rico substantive law and is admittedly a significant departure from what distribution law practitioners have understood or misunderstood for over two decades.
Further, the Court noted two legal permutations of exclusivity: where the defendant agreed not to appoint another agent or sell directly in the territory or the agent agreed to sell exclusively the products of the principal and no other competing product. Because the Court found a dispute of material fact as to whether there was an exclusive contract from a course of dealings as plaintiff was de facto the only distributor, the Court denied the motion for summary judgment. The Court determined that it was for the jury to give weight to any “smoking gun evidence”, if it existed, whether the principal “made an affirmative concession of exclusivity to the representative.” Finally, the Court dismissed the breach of contract claim because there was no evidence that the contract had a definite period; thus, was terminable at will.
Thursday, February 21, 2013
Law 21 claim in the face of an expressly non-exclusive agreement does not survive partial summary judgment, but Court acknowledges important textual interpretation of standing to sue under Law 21
In a previous blog (Jan. 14, 2013), I reported that the question remains unanswered whether a sales representative in Puerto Rico- who represents exclusively the supplier’s products but no competing lines and does so without a written agreement (or is silent on exclusivity)-states a claim under Law 21.
Most courts, and Gonzalez v. Hurley International LLC, 2013 WL 371766 (D.P.R. Jan. 31, 2013)(SEC), is no exception, endorse the view that the exclusivity contemplated by Law 21 means either a restriction on the supplier’s right to appoint a competitor or the grant of an intra-brand monopoly to the sales representative. It is fairly predictable that, as in Hurley, most Law 21 cases fail to state an actionable claim when the de facto exclusive representative (like a “sole” distributor, meaning there is no one else but him or her representing the line in the territory) does business with an expressly non-exclusive written agreement. There should be no ambiguity there and that explains why the claim fails. Still, the question of statutory interpretation lingers whether one of the formulations of exclusivity that textually is possible under Law 21 is something different; that is, the representative has assumed the obligation not to represent competing lines, so that the character of his representation is “exclusive” for his principal. His or her attention is dedicated exclusively to the principal.
In a thoughtful opinion, Hurley addresses that question, although it concedes that it is not necessary for its holding. Hurley involved a motion for summary judgment to dismiss plaintiff’s claim brought under Law 21. Plaintiff, a representative of surfing wear clothing and equipment, filed suit alleging an unjustified termination of a sales representative agreement. Plaintiff alleged that Hurley’s founder had verbally appointed her as the exclusive representative and required her not to compete by offering similar products. Plaintiff was not the sole representative as Hurley offered its products for sale in Puerto Rico through other channels, including licensees and national accounts, such as Costco. Much to plaintiff’s chagrin, she signed an expressly non-exclusive agreement which expired, but the parties continued doing business under the same terms and conditions until the unilateral termination of the business relationship.
The thrust of the decision granting partial summary judgment for Hurley is that where, as here, the terms of the contract are clear and unambiguous, those terms must be enforced under the Civil Code so that plaintiff is clearly a non-exclusive representative and has no actionable claim under Law 21 for at least claims arising during the duration of the agreement. It does not matter that, verbally or from a course of dealings, plaintiff may have been the sole representative or was bound by a verbal agreement not to compete.
Plaintiff then argued that the court should disregard the non-exclusive terms of the agreement and accept the business reality that the “arrangements of the parties” evidenced exclusivity. For this proposition, plaintiff argued that Law 21 is of public order and the rights cannot be waived. The Court correctly noted that the anti-waiver provision in Law 21 was meant to prevent situations where the principal purposefully conceals aspects of the business relationship to avoid liability under Law 75, citing Advance Exp., Inc. v. Medline Indus., No. 06–1527, 2007 WL 853745, at *2 (D.P.R. Mar.19, 2007), not to excuse the parties from clear and unambiguous contracts they have willingly subscribed. As the Court carefully noted, “[s]he cannot now use Law 21’s liberal undertone as a sword with which to cut down what she voluntarily agreed to in the first place.” So, the waiver argument fails. The written agreement overrides the verbal allegations of exclusivity. Accordingly, the Court dismissed the Law 21 claim stemming from 2007-2009 for the duration of the agreement.
With respect to claims arising before entering into the agreement, the court also granted summary judgment reasoning that the claims were time barred. As to the six-month gap where the parties continued to do business after expiration of the agreement, Hurley failed to prove extinctive novation and the Law 21 claim for that period survived termination. There was a triable jury issue on whether the parties’ modus operandi evinced exclusivity.
The Court went further. In dicta, the Court delved into the unanswered question of statutory interpretation and acknowledged the textual meaning of Law 21: “Whether an agent is the sole sales representative within a defined territory, and whether her sole business is to represent the principal’s products or services (like González), then, should be of some consequence to the exclusivity determination. At the outset, this interpretation (the “Traditional Interpretation”) comports with the ordinary meaning (or at the very least one meaning) of the word exclusive. See, e.g., City of Vicksburg v. Vicksburg Waterworks Co., 202 U.S. 457, 471 (1906) (finding that exclusive means ‘[a]ppertaining to the subject alone; not including, admitting, or pertaining to any other or others; undivided; sole: as, an exclusive right or privilege ...” (citation and internal quotation marks omitted; emphasis added); Webster’s Ninth New Collegiate Dictionary 433 (1986) (defining exclusive as “limiting or limited to possession, control, or use by a single individual or group” or as “single, sole”). The Traditional Interpretation is also in accord with the Civil Code’s provision that “[t]he words of a law shall generally be understood in their most usual signification, taking into consideration, not so much the exact grammatical rules governing the same, as their general and popular use.”
Further, as I had observed in my Blog, the Court noted: “Cruz–Marcano seems to have left unanswered the question whether exclusivity is simply a limitation on the principal’s right to compete (the mercantile law definition), or whether it can also encompass the Traditional Interpretation: a non-compete obligation by a sole sales representatives whose business is solely to represent the principal’s products. Sales representatives like González would greatly benefit from this latter interpretation, which may further the objective behind Law 21 of placing the sales representatives on equal footing with the distributors currently protected by Law 75.”
In the end, the Court held that plaintiff “has completely ignored this important argument” and was waived. Having ruled that plaintiff’s Law 21 claim partially survived summary judgment, the Court then held that Hurley’s just cause defense was a factual issue for the jury.
Most courts, and Gonzalez v. Hurley International LLC, 2013 WL 371766 (D.P.R. Jan. 31, 2013)(SEC), is no exception, endorse the view that the exclusivity contemplated by Law 21 means either a restriction on the supplier’s right to appoint a competitor or the grant of an intra-brand monopoly to the sales representative. It is fairly predictable that, as in Hurley, most Law 21 cases fail to state an actionable claim when the de facto exclusive representative (like a “sole” distributor, meaning there is no one else but him or her representing the line in the territory) does business with an expressly non-exclusive written agreement. There should be no ambiguity there and that explains why the claim fails. Still, the question of statutory interpretation lingers whether one of the formulations of exclusivity that textually is possible under Law 21 is something different; that is, the representative has assumed the obligation not to represent competing lines, so that the character of his representation is “exclusive” for his principal. His or her attention is dedicated exclusively to the principal.
In a thoughtful opinion, Hurley addresses that question, although it concedes that it is not necessary for its holding. Hurley involved a motion for summary judgment to dismiss plaintiff’s claim brought under Law 21. Plaintiff, a representative of surfing wear clothing and equipment, filed suit alleging an unjustified termination of a sales representative agreement. Plaintiff alleged that Hurley’s founder had verbally appointed her as the exclusive representative and required her not to compete by offering similar products. Plaintiff was not the sole representative as Hurley offered its products for sale in Puerto Rico through other channels, including licensees and national accounts, such as Costco. Much to plaintiff’s chagrin, she signed an expressly non-exclusive agreement which expired, but the parties continued doing business under the same terms and conditions until the unilateral termination of the business relationship.
The thrust of the decision granting partial summary judgment for Hurley is that where, as here, the terms of the contract are clear and unambiguous, those terms must be enforced under the Civil Code so that plaintiff is clearly a non-exclusive representative and has no actionable claim under Law 21 for at least claims arising during the duration of the agreement. It does not matter that, verbally or from a course of dealings, plaintiff may have been the sole representative or was bound by a verbal agreement not to compete.
Plaintiff then argued that the court should disregard the non-exclusive terms of the agreement and accept the business reality that the “arrangements of the parties” evidenced exclusivity. For this proposition, plaintiff argued that Law 21 is of public order and the rights cannot be waived. The Court correctly noted that the anti-waiver provision in Law 21 was meant to prevent situations where the principal purposefully conceals aspects of the business relationship to avoid liability under Law 75, citing Advance Exp., Inc. v. Medline Indus., No. 06–1527, 2007 WL 853745, at *2 (D.P.R. Mar.19, 2007), not to excuse the parties from clear and unambiguous contracts they have willingly subscribed. As the Court carefully noted, “[s]he cannot now use Law 21’s liberal undertone as a sword with which to cut down what she voluntarily agreed to in the first place.” So, the waiver argument fails. The written agreement overrides the verbal allegations of exclusivity. Accordingly, the Court dismissed the Law 21 claim stemming from 2007-2009 for the duration of the agreement.
With respect to claims arising before entering into the agreement, the court also granted summary judgment reasoning that the claims were time barred. As to the six-month gap where the parties continued to do business after expiration of the agreement, Hurley failed to prove extinctive novation and the Law 21 claim for that period survived termination. There was a triable jury issue on whether the parties’ modus operandi evinced exclusivity.
The Court went further. In dicta, the Court delved into the unanswered question of statutory interpretation and acknowledged the textual meaning of Law 21: “Whether an agent is the sole sales representative within a defined territory, and whether her sole business is to represent the principal’s products or services (like González), then, should be of some consequence to the exclusivity determination. At the outset, this interpretation (the “Traditional Interpretation”) comports with the ordinary meaning (or at the very least one meaning) of the word exclusive. See, e.g., City of Vicksburg v. Vicksburg Waterworks Co., 202 U.S. 457, 471 (1906) (finding that exclusive means ‘[a]ppertaining to the subject alone; not including, admitting, or pertaining to any other or others; undivided; sole: as, an exclusive right or privilege ...” (citation and internal quotation marks omitted; emphasis added); Webster’s Ninth New Collegiate Dictionary 433 (1986) (defining exclusive as “limiting or limited to possession, control, or use by a single individual or group” or as “single, sole”). The Traditional Interpretation is also in accord with the Civil Code’s provision that “[t]he words of a law shall generally be understood in their most usual signification, taking into consideration, not so much the exact grammatical rules governing the same, as their general and popular use.”
Further, as I had observed in my Blog, the Court noted: “Cruz–Marcano seems to have left unanswered the question whether exclusivity is simply a limitation on the principal’s right to compete (the mercantile law definition), or whether it can also encompass the Traditional Interpretation: a non-compete obligation by a sole sales representatives whose business is solely to represent the principal’s products. Sales representatives like González would greatly benefit from this latter interpretation, which may further the objective behind Law 21 of placing the sales representatives on equal footing with the distributors currently protected by Law 75.”
In the end, the Court held that plaintiff “has completely ignored this important argument” and was waived. Having ruled that plaintiff’s Law 21 claim partially survived summary judgment, the Court then held that Hurley’s just cause defense was a factual issue for the jury.
Monday, January 14, 2013
What does exclusivity mean in Law 21? The question should be revisited.
Dear readers, I’d like to start the New Year with a provocative thought.
There is a substantial body of case law holding that a sales representative cannot have an actionable Law 21 claim without an exclusive contract with a manufacturer or grantor. See, e.g., Cruz Marcano v. Sanchez Tarazona, 172 D.P.R. 526 (2007)(adopting a commercial definition of exclusivity). Plain text of Law 21 defines a sales representative as “an independent entrepreneur who with a character of exclusivity establishes a sales representative contract with a principal or grantor…” 10 Laws of P.R. Annot. §279 (a)(translation ours).
One has to wonder- from a public policy standpoint- the legislative wisdom behind the exclusivity requirement in Law 21. After all, Law 21 is patterned after Law 75 and Law 75 does not require exclusivity for an actionable claim brought by a non-exclusive dealer. Further, Law 21 was enacted precisely to provide a remedy to those commercial agents left unprotected by Law 75, Roberco v. Oxford, 88 J.T.S. 102 (1988). It seems counterintuitive that a remedial statute enacted to fill gaps in another special law would leave the beneficiaries, i.e., non-exclusive sales representatives, without a remedy for unjustified actions by their grantors when their dealer counterparts have legal protection. See Statement of Motives, P. of S. 793, December 5, 1990.
Legislative wisdom aside, the plain text of Law 21 requires exclusivity and courts cannot overlook the statute as written, but the question arises what does exclusivity mean? Without statutory or contractual definitions, the word exclusive, by itself, may turn out to be vague or ambiguous, especially in this new age of sales through the internet, the expansion of club stores and the presence of national accounts doing business without borders. Courts have defined exclusivity as limiting the supplier’s right to sell directly or appoint another competing distributor in the territory. Exclusivity can be airtight to prohibit all intra-brand competition or limited in scope by products, clientele, or territory. These are commercial definitions of exclusivity that have been developed from a course of dealings, precedent, commercial contracts, and treatises.
What the cases have left unanswered, however, as the issue may not have been raised, is whether exclusivity is simply a limitation on the supplier’s right to compete or can it be something else. What else could it be? Start with plain text (and the Spanish language controls). The qualifier of exclusivity in §279 (a) appears before not after the definition of the object of the “sales representative agreement” which is the grant of a specific territory or market within Puerto Rico. The statute does not say an “exclusive contract with a principal or grantor”, but rather, defines the sales representative as an “independent entrepreneur quién con carácter de exclusividad (who with a character of exclusivity) establishes a sales representative contract with a principal or grantor…”. Moreover, “sales representative contract” is a defined term in §279(c) and nowhere does that definition mention exclusivity as an element of a claim. Does the order or sequence of the exclusivity qualifier in the plain statutory text make a difference? Certainly, an argument can be made that it does. Had the Legislature intended to define exclusivity as a restriction or self-limitation on the supplier’s grant it would have chosen to add exclusivity after but not before the reference to the sales representative contract.
Then, what does it mean the “character of exclusivity” of the “independent entrepreneur”? In this context, the ordinary meaning of exclusivity is subject to several connotations: “limiting or limited to possession, control, or use by a single group or individual”, “excluding others from participation.” See Merriam-Webster’s on line dictionary. An authoritative Spanish Dictionary, cited in Cruz Marcano, supra, defines exclusivity as “the privilege or right by which a person or entity can do something prohibited to others.” These definitions support the commercial meaning of exclusivity endorsed by the courts. El Diccionario de la Real Academia Espanola (8th ed.) also provides an ordinary meaning definition not mentioned by the Cruz Marcano court which is “único, solo, excluyendo a cualquier otro.” Webster’s alternative definition is similar: “whole, undivided” as in exclusive attention paid by him or her.
Should the text follow a commercial definition, as precedent requires, or should the text be construed by its ordinary meaning, especially when ordinary meaning also has a valid and established commercial use, as in a non-compete obligation by the agent? It is certainly arguable that the character of exclusivity means the “whole, undivided” attention paid by the independent entrepreneur to the supplier’s products to the exclusion of competing products which is akin to a non-compete obligation. A sales representative may have an obligation either not to compete with similar products of the supplier (the “exclusive” character of the agent’s business) or he or she may represent solely the supplier’s products not because it has agreed not to compete but because that is the character of his or her business. Cruz Marcano left the door open for this alternative reasoning because it defines one element of Law 21 as requiring evidence that the agent has “promot[ed] and transact[ed] in an exclusive manner contracts on behalf of a principal...” (translation ours).
Following an ordinary meaning of the word exclusive and assuming the absence of an expressly non-exclusive contract, the “exclusive” entrepreneur (dedicated to serve solely the grantor’s products) that has developed or expanded the market and clientele for the principal's products or services could have an actionable Law 21 termination claim even though the supplier or grantor never granted exclusivity to preclude intra-brand competition. As precedent now stands, these "exclusive" sales representatives, but "non-exclusive" in the commercial sense of the word, would have no relief under Law 21 for an unjustified termination of the relationship.
If it were proper to look at legislative history in this context, it is either inconclusive or suggestive of intent not to exclude agents from protection. There is no discussion about the scope of exclusivity other than to indicate the types of agents that previously had no protection and would have protection now, including representatives of pharmaceutical products (“representantes de fabrica”). There was some discussion not to limit the scope to mercantile transactions but to encompass civil contracts as well. The definition of sales representative underwent modifications as the bill passed through the House and the Senate. Initially, the statute defined the “exclusivity character or not”, see P. of S. 793, May 3, 1990, and the word “no” was deleted from the final bill. While this clearly suggests that a non-exclusive agent would not be protected as supported by plain text, legislative history seems inconclusive on the meaning and scope of exclusivity.
To be sure, non-exclusive sales representatives are left out in the cold unless the Legislature amends Law 21. But a class of agents whose business is solely to represent the principal's products or services, have a leg to stand on, if courts open the envelope and reconsider what exclusivity means.
There is a substantial body of case law holding that a sales representative cannot have an actionable Law 21 claim without an exclusive contract with a manufacturer or grantor. See, e.g., Cruz Marcano v. Sanchez Tarazona, 172 D.P.R. 526 (2007)(adopting a commercial definition of exclusivity). Plain text of Law 21 defines a sales representative as “an independent entrepreneur who with a character of exclusivity establishes a sales representative contract with a principal or grantor…” 10 Laws of P.R. Annot. §279 (a)(translation ours).
One has to wonder- from a public policy standpoint- the legislative wisdom behind the exclusivity requirement in Law 21. After all, Law 21 is patterned after Law 75 and Law 75 does not require exclusivity for an actionable claim brought by a non-exclusive dealer. Further, Law 21 was enacted precisely to provide a remedy to those commercial agents left unprotected by Law 75, Roberco v. Oxford, 88 J.T.S. 102 (1988). It seems counterintuitive that a remedial statute enacted to fill gaps in another special law would leave the beneficiaries, i.e., non-exclusive sales representatives, without a remedy for unjustified actions by their grantors when their dealer counterparts have legal protection. See Statement of Motives, P. of S. 793, December 5, 1990.
Legislative wisdom aside, the plain text of Law 21 requires exclusivity and courts cannot overlook the statute as written, but the question arises what does exclusivity mean? Without statutory or contractual definitions, the word exclusive, by itself, may turn out to be vague or ambiguous, especially in this new age of sales through the internet, the expansion of club stores and the presence of national accounts doing business without borders. Courts have defined exclusivity as limiting the supplier’s right to sell directly or appoint another competing distributor in the territory. Exclusivity can be airtight to prohibit all intra-brand competition or limited in scope by products, clientele, or territory. These are commercial definitions of exclusivity that have been developed from a course of dealings, precedent, commercial contracts, and treatises.
What the cases have left unanswered, however, as the issue may not have been raised, is whether exclusivity is simply a limitation on the supplier’s right to compete or can it be something else. What else could it be? Start with plain text (and the Spanish language controls). The qualifier of exclusivity in §279 (a) appears before not after the definition of the object of the “sales representative agreement” which is the grant of a specific territory or market within Puerto Rico. The statute does not say an “exclusive contract with a principal or grantor”, but rather, defines the sales representative as an “independent entrepreneur quién con carácter de exclusividad (who with a character of exclusivity) establishes a sales representative contract with a principal or grantor…”. Moreover, “sales representative contract” is a defined term in §279(c) and nowhere does that definition mention exclusivity as an element of a claim. Does the order or sequence of the exclusivity qualifier in the plain statutory text make a difference? Certainly, an argument can be made that it does. Had the Legislature intended to define exclusivity as a restriction or self-limitation on the supplier’s grant it would have chosen to add exclusivity after but not before the reference to the sales representative contract.
Then, what does it mean the “character of exclusivity” of the “independent entrepreneur”? In this context, the ordinary meaning of exclusivity is subject to several connotations: “limiting or limited to possession, control, or use by a single group or individual”, “excluding others from participation.” See Merriam-Webster’s on line dictionary. An authoritative Spanish Dictionary, cited in Cruz Marcano, supra, defines exclusivity as “the privilege or right by which a person or entity can do something prohibited to others.” These definitions support the commercial meaning of exclusivity endorsed by the courts. El Diccionario de la Real Academia Espanola (8th ed.) also provides an ordinary meaning definition not mentioned by the Cruz Marcano court which is “único, solo, excluyendo a cualquier otro.” Webster’s alternative definition is similar: “whole, undivided” as in exclusive attention paid by him or her.
Should the text follow a commercial definition, as precedent requires, or should the text be construed by its ordinary meaning, especially when ordinary meaning also has a valid and established commercial use, as in a non-compete obligation by the agent? It is certainly arguable that the character of exclusivity means the “whole, undivided” attention paid by the independent entrepreneur to the supplier’s products to the exclusion of competing products which is akin to a non-compete obligation. A sales representative may have an obligation either not to compete with similar products of the supplier (the “exclusive” character of the agent’s business) or he or she may represent solely the supplier’s products not because it has agreed not to compete but because that is the character of his or her business. Cruz Marcano left the door open for this alternative reasoning because it defines one element of Law 21 as requiring evidence that the agent has “promot[ed] and transact[ed] in an exclusive manner contracts on behalf of a principal...” (translation ours).
Following an ordinary meaning of the word exclusive and assuming the absence of an expressly non-exclusive contract, the “exclusive” entrepreneur (dedicated to serve solely the grantor’s products) that has developed or expanded the market and clientele for the principal's products or services could have an actionable Law 21 termination claim even though the supplier or grantor never granted exclusivity to preclude intra-brand competition. As precedent now stands, these "exclusive" sales representatives, but "non-exclusive" in the commercial sense of the word, would have no relief under Law 21 for an unjustified termination of the relationship.
If it were proper to look at legislative history in this context, it is either inconclusive or suggestive of intent not to exclude agents from protection. There is no discussion about the scope of exclusivity other than to indicate the types of agents that previously had no protection and would have protection now, including representatives of pharmaceutical products (“representantes de fabrica”). There was some discussion not to limit the scope to mercantile transactions but to encompass civil contracts as well. The definition of sales representative underwent modifications as the bill passed through the House and the Senate. Initially, the statute defined the “exclusivity character or not”, see P. of S. 793, May 3, 1990, and the word “no” was deleted from the final bill. While this clearly suggests that a non-exclusive agent would not be protected as supported by plain text, legislative history seems inconclusive on the meaning and scope of exclusivity.
To be sure, non-exclusive sales representatives are left out in the cold unless the Legislature amends Law 21. But a class of agents whose business is solely to represent the principal's products or services, have a leg to stand on, if courts open the envelope and reconsider what exclusivity means.
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