Would Law 75 apply to protect stateside or foreign distributors that resell merchandise or provide services to customers in Puerto Rico?

The answer is “probably not” from the mere act of selling, distributing or servicing products to customers in Puerto Rico.

Puerto Rico Law 75, Sec. 278(a), defines a dealer as the person in charge “in Puerto Rico” of the distribution of a given merchandise or service. In A. M. Capen’s v. American Trading, 202 F. 3d 469 (1st Cir. 2000), the First Circuit, after applying Puerto Rico law, held that the “in Puerto Rico” requirement of Law 75 meant that the dealer must be located in, be a resident of or be authorized to do business in Puerto Rico. There, a New Jersey corporation with its principal place of business in New Jersey claimed Law 75 protection from the termination of an exclusivity contract. The distributor alleged that taking orders from Puerto Rican customers, selling into the territory and having a sales agent make occasional visits to Puerto Rico qualified the distributor for Law 75 protection. However, the New Jersey distributor did not advertise in Puerto Rico, nor did it maintain a warehouse, showroom, assets, inventory, employees, office, address or telephone number in Puerto Rico. On these facts, the appellate court held that the New Jersey distributor did not operate in Puerto Rico to qualify for protection under Law 75 and reversed the finding of liability under Law 75.

A stateside or foreign distributor would not qualify for Law 75 protection merely because it has a contract with the principal that requires the sale and distribution of products in Puerto Rico. Occasional visits by a sales agent, standing alone, would not tilt the balance to qualify as a dealer. By the same token, the status of the distributor as a foreign or stateside corporation would not automatically exclude the application of Law 75, though the statute clearly applies only to entities “in Puerto Rico”. Depending on the circumstances, it appears from Capen's that a stateside or foreign corporation could qualify for protection if it becomes registered to do business in Puerto Rico or performs substantial operations in Puerto Rico with respect to the distribution relationship.

Parties could potentially minimize (but not altogether exclude Law 75 exposure) by: 1) entering into a Capen’s style distribution relationship with a stateside or foreign corporation that does not operate within and is not registered to do business in Puerto Rico, and 2) enter into a “limited functions” purchase and sale type of agreement.

Lower court legislates to create a blanket exclusion for sub-distributors from Law 75 protection

In a ruling that should come as a surprise to some, a lower court in Puerto Rico, in Autos Servicios Nissan Kia Inc. v. Motorambar, Inc. No. KAC2008-1390 (906)(San Juan Part, March 4, 2009)(Olivette Sagebien Raffo, J.), held that plaintiff, a sub-distributor of Nissan and Kia automobiles, did not qualify for protection as a Law 75 dealer because it had no distribution agreements with the manufacturers. In a ruling that could have far-reaching implications beyond the facts of the case, the court also held that defendant, the exclusive general distributor in Puerto Rico, who appointed the sub-distributor, was not a “principal” for purposes of being able to confer distribution rights under Law 75. The court found that Law 75’s definition of a “principal or grantor” as the person who enters into a dealer’s contract with a distributor “clearly did not apply” to a general distributor who grants distribution rights to a sub-distributor. The court then relied on Law 75’s legislative history to conclude that the intent was to provide a remedy against abusive practices of manufacturers who cancel unilaterally the distribution rights of distributors. According to this analysis, the principal can only be the manufacturer of a product or service. The case is still pending but the decision has not been appealed.

The lower court’s holding is difficult to reconcile with the plain language of Law 75, its remedial purpose, and with precedent not discussed by the lower court. In J. Soler Motors v. Kaiser Jeep Int’l, 108 D.P.R. 134 (D.P.R. 1978), the Supreme Court of Puerto Rico court rejected an argument that Law 75 does not protect a non-exclusive retailer of automobiles in a geographic region within the territory. The court recognized that “in the transfer of a product from the manufacturer to the consumer a number of intermediaries are involved in forming the chain of distribution.” (Translation ours). Construing the statutory definitions of a Law 75 dealer broadly and finding no provision excluding non-exclusive retailers, the court held that “Law 75 has the purpose of protecting the Puerto Rican intermediaries that represent a product or service in the different levels of the chain of distribution.” (Translation ours).

The lower court’s Motorambar’s blanket exclusion that Law 75 protects only the vertical relationships between a manufacturer and a distributor is questionable for it ignores that many other intermediaries participate in the chain of distribution, including sub-distributors, who may qualify for protection under Law 75.