Caribe Industrial Systems, Inc. v. Nat'l Starch & Chemical Co.

• Decision Date: 03 November 2000
• Docket Number: No. 99-1447,99-1447
• Citation: 212 F.3d 26
• Parties: (1st Cir. 2000) CARIBE INDUSTRIAL SYSTEMS, INC., PLAINTIFF, APPELLANT, v. NATIONAL STARCH AND CHEMICAL COMPANY, DEFENDANT, APPELLEE. Heard
• Court: U.S. Court of Appeals — First Circuit

Page 26

212 F.3d 26 (1st Cir. 2000)

CARIBE INDUSTRIAL SYSTEMS, INC., PLAINTIFF, APPELLANT, v. NATIONAL STARCH AND CHEMICAL COMPANY, DEFENDANT, APPELLEE.

No. 99-1447

United States Court of Appeals For the First Circuit

Heard November 3, 2000

Decided May 8, 2000

Eric Perez-Ochoa, with whom Anabelle Rodriguez Rodriguez and Martinez Odell & Calabria were on brief for appellant.

Jaime E. Toro-Monserrate, with whom McConnell Valdes was on brief for appellee.

Before Lynch, Circuit Judge, Campbell, Senior Circuit Judge, and O'Toole, District Judge. ^*

Campbell, Senior Circuit Judge.

Plaintiff-appellant Caribe Industrial Systems Inc. ("Caribe") sued its principal, defendant-appellee National Starch and Chemical Company ("National"), under the Puerto Rico Dealer's Act. The district court dismissed Caribe's complaint for failure to state a claim, holding that National did not violate the Dealer's Act by selling goods directly to Checkpoint Systems, Inc. ("Checkpoint"), a company with which Caribe had been dealing. We affirm the decision below, although on different grounds than those stated by the district court.

I. BACKGROUND

In its complaint, Caribe alleges the following facts: National manufactures adhesive products, which are sold through a network of distributors. Caribe is a Puerto Rican distributor that markets and sells industrial packaging machinery and materials, including adhesive products.

On August 1, 1983, Caribe and National entered into a written Distributor Agreement ("the Agreement"), wherein National agreed to supply and Caribe agreed to distribute certain adhesive products in a designated territory. Caribe agreed to be a "non-exclusive" distributor of National's product line in Puerto Rico. The Agreement provided in Article 2 that "Distributor's territory shall be non-exclusive territory." ¹ The Agreement further provided, in Article 7, that "National reserves the right to sell the Products directly to its customers." Notwithstanding the non-exclusivity provisions, Caribe was the sole distributor of National's products in Puerto Rico for approximately fourteen years.

Beginning in 1993, Caribe sold National's "hot melt" adhesive products to Checkpoint. Caribe obtained Checkpoint's business through its promotional and marketing efforts, and its sales to Checkpoint represented approximately sixty percent of Caribe's total sales of adhesives. In December 1996, Checkpoint and Caribe executed an open-ended purchase order that terminated in December 1997.

In or around March of 1997, Checkpoint informed Caribe that it intended to locally manufacture the hot melt adhesives that it had been purchasing from Caribe. Caribe attempted to dissuade Checkpoint from doing so. On or around March 26, 1997, Caribe met with Checkpoint to "discuss the situation and to attempt to discourage [Checkpoint] from manufacturing the products." Checkpoint stated at this meeting that it had already ordered equipment to manufacture the adhesives. Hence, Caribe and Checkpoint were unable to reach agreement.

Caribe notified National of Checkpoint's plans. National initially expressed skepticism as to Checkpoint's ability to manufacture its own adhesives. Together, Caribe and National "attempted to seek economically viable alternatives that would convince Checkpoint not to engage in the manufacturing of hot melt adhesives. . ." In or around April 1997, National told Caribe that in response to Checkpoint's actions, it wished to lower its prices. Caribe responded by offering to reduce its profits to make its products more economically attractive to Checkpoint, and to exclude the Checkpoint account from the distributorship arrangement. Caribe drafted and sent a "Memorandum of Understanding" to National setting forth these proposals. National rejected Caribe's proposals, asking Caribe to take a larger cut in profits instead. Caribe refused to do so.

National and Checkpoint met in May, 1997, to discuss Checkpoint's announcement that it would be making adhesives in-house. At this time, National became convinced that Checkpoint indeed had the capacity to manufacture its own adhesives. On June 26, 1997, National told Caribe that it had met privately with Checkpoint earlier that month. At that meeting, National and Checkpoint had agreed that instead of manufacturing the adhesives itself, Checkpoint would buy them directly from National, omitting Caribe from the distribution chain.

In June, 1997, Checkpoint told Caribe that effective June 30, 1997, it would be buying materials directly from National without an intermediary. Checkpoint agreed, however, to honor a ninety-day cancellation clause in the open-ended purchase order. On July 25, 1997, Checkpoint sent another letter "officially" terminating the purchase order. Checkpoint bought hot melt adhesives directly from National beginning in September or October, 1997.

On September 29, 1997, Caribe filed a complaint in the federal district court for the District of Puerto Rico against National, seeking damages and provisional relief pursuant to the Puerto Rico Dealer's Act of June 24, 1964 ("Law 75"), P.R. Laws Ann. tit. 10, § 278 et seq. Caribe contended that National violated Law 75 by performing acts detrimental to the established relationship between the parties by setting up its own distribution system directly with Checkpoint.

On October 29, 1997, National filed a motion to dismiss for failure to state a claim pursuant to Fed. R. Civ. P. 12(b)(6). National contended that it did nothing wrong by entering a direct relationship with Checkpoint, because Checkpoint had already terminated its customer relationship with Caribe and the Agreement was non-exclusive. Caribe opposed the motion to dismiss and amended its complaint to add a cause of action for tortious interference with a contractual relationship.

On February 23, 1999, the district court allowed National's motion to dismiss, although based on somewhat different reasoning than that advanced by National. See Caribe Indus. Sys., Inc. v. National Starch & Chem. Co., 36 F. Supp. 2d 448 (D.P.R. 1999). It characterized the issue before it as "whether a non-exclusive distribution agreement under Law 75, although flexible to allow multiple distributors, nevertheless forbids the principal from supplying its products directly to the customers of its own distributors." Id. at 450. It concluded that no cause of action lies under Law 75 where a principal sells directly to a customer of a non-exclusive dealer. The district court also held that Caribe did not state a claim for tortious interference with a contractual relationship. Caribe appeals.

DISCUSSION

We apply "a de novo standard of review to a district court's allowance of a motion to dismiss for failure to state a claim." New England Cleaning Servs., Inc. v. American Arbitration Ass'n, 199 F.3d 542, 544 (1st Cir. 1999) (citation omitted). Caribe contends that the district court incorrectly applied Rule 12(b)(6) in that it failed to take as true the allegation that Checkpoint was Caribe's customer, not National's customer. In Caribe's view, this distinction made it improper for National to sell directly to Checkpoint, notwithstanding the Agreement's non-exclusivity. Caribe contends that the provision in Article 7 stating that "National reserves the right to sell the Products directly to its customers" (emphasis supplied) should be read as limiting National's sales to those who are not the customers of its distributors. In support of that argument, Caribe suggests that Checkpoint remained its customer even after Checkpoint announced its intention to discontinue purchasing product from Caribe. Caribe further argues that the court misapplied controlling case law in concluding that National did not perform any acts detrimental to the established relationship between the parties.

Puerto Rico's Law 75 governs the business relationship between principals and the locally appointed distributors who market their products. See Irvine v. Murad Skin Research Labs., Inc., 194 F.3d 313, 317-18 (1st Cir. 1999). In order to avoid the inequity of arbitrary termination of distribution relationships once the distributor has developed a local market for the principal's products or services, Law 75 limits the principal's ability to unilaterally end the relationship except for "just cause." P.R. Laws Ann. tit. 10, § 278a. In 1966, the protection afforded to distributors under Law 75 was extended to include the conduct of a principal "detrimental to the established relationship," even where the contract was not terminated. See id.; see also Irvine, 194 F.3d at 317-18.

In the present case, National did not terminate Caribe's status as a distributor of its products. The sole issue is whether National engaged in conduct detrimental to the distribution relationship. See P.R. Laws Ann. tit. 10, § 278a. ² "The question whether there has been a `detriment' to the existing relationship between supplier and dealer is just another way of asking whether the terms of the contract existing between the parties have been impaired." Vulcan Tools of Puerto Rico v. Makita U.S.A., Inc., 23 F.3d 564, 569 (1st Cir. 1994). Hence, the parameters of Caribe's Law 75 rights, as the district court correctly noted, are established by the terms of Agreement. "[T]he `established relationship' between dealer and principal is bounded by the distribution agreement, and therefore the Act only protects against detriments to contractually acquired rights." Id. (citation omitted).

The district court framed Caribe's legal argument as follows:

(1) Even if Caribe has a non-exclusive distributorship agreement with National,...