Nike Intern. Ltd. v. Athletic Sales, Inc.

• Decision Date: 01 July 1988
• Docket Number: Civ. No. 86-0849(RLA).
• Citation: 689 F. Supp. 1235
• Parties: NIKE INTERNATIONAL LTD., Plaintiff, v. ATHLETIC SALES, INC.; the Venrod Corporation, Defendants.
• Court: U.S. District Court — District of Puerto Rico

689 F. Supp. 1235

NIKE INTERNATIONAL LTD., Plaintiff, v. ATHLETIC SALES, INC.; the Venrod Corporation, Defendants.

Civ. No. 86-0849(RLA).

United States District Court, D. Puerto Rico.

July 1, 1988.

Pedro J. Santa, Jorge L. Peirats, O'Neill & Borges, Hato Rey, P.R., for plaintiff.

Edilberto Berrios Pérez, San Juan, P.R., Carlos T. González Contreras, Vazquez

Vizcarrondo Alvarez Angelet & Gonzalez, Hato Rey, P.R., Federico Cedó Alzamora, Aida G. Rivera Carattini, Dept. of Justice, San Juan, P.R., for defendants.

OPINION AND ORDER

ACOSTA, District Judge.

Plaintiff, Nike International Ltd. ("Nike"), filed the present action against defendants, Athletic Sales, Inc. ("ASI") and the Venrod Corporation ("Venrod") seeking a declaratory judgment stating that a Distribution Agreement between Nike and ASI and a Sub-Distributor Agreement between all three parties expired because of ASI's failure to give the required written notice of its desire to extend the term of the Distribution Agreement as specified in the contract. Both defendants counterclaimed against Nike seeking monetary and injunctive relief for the alleged breach of the Puerto Rico Dealer's Act 75 of June 24, 1964 as amended, 10 L.P.R.A. § 278, et seq. ("Law 75").

This matter is before us upon plaintiff Nike's motion for partial summary judgment filed on September 10, 1987 (docket No. 33). Nike asserts that ASI failed to renew the Distribution Agreement at the time and in the manner required therein. It further contends that ASI's nonrenewal not only terminated the contract between them, but also extinguished the subcontract ASI and Nike had with codefendant and counterclaimant Venrod and thus feels entitled to partial judgment¹ as a matter of law.

Defendants Venrod and ASI opposed plaintiff's motion. They jointly argue that the renewal clause in the Distribution Agreement is void as contrary to Puerto Rico law and public policy. ASI further argues that "Nike was informed both verbally and in writing ASI's desire to renew and continue the distribution agreement with Nike" (ASI's memorandum in opposition, docket No. 39, p. 9). In addition, defendants counterclaim alleging that Nike is liable to them insofar as they substantially performed their obligations under the contract and thus pursuant to Law 75 they are entitled to specific performance for services rendered and/or for damages resulting from the termination of the contract.

Although ASI filed a petition in bankruptcy under Chapter 11 of Title 11 of the United States Code, those proceedings were "suspended" by bankruptcy Judge Enrique Lamoutte until this Court decides whether or not the Distribution Agreement expired on May 31, 1986 due to ASI's nonrenewal of the same.

The record is now complete and the Court, after careful consideration of the arguments presented by all parties, finds that the Distribution Agreement did expire on May 31, 1986 and hence plaintiff is entitled to partial summary judgment in its favor.

FACTUAL BACKGROUND

The following is an account of the pertinent and undisputed facts:²

1. Nike is a Bermuda corporation with its principal place of business near Portland, Oregon. It distributes athletic footwear, apparel and accessories bearing the "Nike" trademark ("the Nike products") in various areas outside the Continental United States, including Puerto Rico. ASI is a corporation originally formed for the purpose of distributing athletic footwear, apparel, and accessories.

2. On November 29, 1979, BRS, Inc., the predecessor of Nike, appointed ASI distributor of the Nike products in various parts of the Caribbean including Puerto Rico.

3. Thereafter, on February 7, 1984, Nike renewed ASI's appointment as distributor of the Nike products and expanded its distribution "territory." The term of the new agreement was for two (2) years "commencing on June 1, 1984 and ending on May 31, 1986." Thus, the expiration date of the Distribution Agreement was May 31, 1986.

4. Pursuant to the express terms of the Distribution Agreement, ASI had to notify Nike in writing, no later than October 1, 1985, of its desire to extend the duration of the Distribution Agreement beyond May 31, 1986.

5. ASI and Venrod entered into an Agreement ("the Sub-Distributor Agreement") on February 7, 1984, whereby ASI appointed Venrod exclusive sub-distributor of the Nike products in the territory. The Sub-Distributor Agreement was to be effective for a term of seven (7) years, provided ASI's Distribution Agreement with Nike would still be in effect.

6. ASI did not give notice in writing to Nike, on or before October 1, 1985, of its desire to extend the duration of the Distribution Agreement as expressly required by such Agreement. Moreover, although not required to do so, it is undisputed that Venrod, the more active of the two defendants, similarly failed to provide notice of an intent to renew.

7. ASI has no employees or officers other than its President, Mr. Ovidio Torres, who was also a fullfledged employee of Venrod at least from 1984 to 1986 and thereafter has remained a salaried "consultant" to Venrod. ASI at all times had the same principal place of business as Venrod. (See generally transcript of the September 30, 1986 deposition of Mr. Torres/ASI and other related exhibits attached to plaintiff's Motion to Dismiss ASI's Bankruptcy Petition, copy of which was filed in conjunction with the parties' Joint Motion Requesting Temporary Stay ... (docket No. 22)).

8. In view of ASI's failure to give the required written notice to renew the contract within the specified period of time, Nike, on May 30, 1986, sent written notice to Venrod and ASI of, inter alia, the expiration of the Distribution Agreement. On that date it also filed the instant action. Defendants then counterclaimed.

9. On June 27, 1986 ASI filed a petition in bankruptcy under Chapter 11 of Title 11 of the United States Code. Thereafter, the instant proceedings were stayed pending the Bankruptcy Court's resolution of Nike's motion to dismiss the bankruptcy petition.

10. On May 21, 1987, United States Bankruptcy Judge Enrique Lamoutte "suspended" all proceedings in the Bankruptcy Court until this Court decides whether or not the Distribution Agreement expired on May 31, 1986. See In re Athletic Sales, Inc., No. 86-01189 (Opinion and Order, May 21, 1987).

DISCUSSION

Law 75

Law 75 was enacted on June 24, 1964 and is codified in 10 L.P.R.A. § 278 et seq. The law reflects a legislative concern for protecting a distributor (read also: dealer) against a principal's (read also: supplier or manufacturer) unjust termination of the distribution agreement. The statute not only protects local distributors from arbitrary terminations by manufacturers, but it goes so far as to bind the manufacturer to the contract unless it can otherwise show a specific form of just cause³ for the termination. 10 L.P.R.A. § 278a.

In sum, the basic purpose of this law is to highly compensate, (i.e., five times the dealer's average annual profits, plus goodwill) the dealer for the hard-earned clientele unjustly appropriated by the supplier. See Statement of Motives of Act No. 75, Vol. 18, Part 4, Diario de Sesiones 1724; see generally Paul Salamone, Puerto Rico's Distributor's Law: Law 75: A Primer, 18:1 Revista Jurídica de la Universidad Interamericana 67 (1983). Law 75 is thus very much a "one-way street" designed to protect dealers from the unwarranted acts of termination by suppliers. Although the act gives dealers a right to sue when a supplier, without just cause, unilaterally terminates a contract, it does not, however, protect dealers from their own follies which lead to the preconceived expiration of distributorship agreements.

Law 75, a relatively straightforward statute, is silent as to the effect of a dealer's walking away from an exclusive distribution relationship either by action or omission. And rightly so. The statute looks only to the peccant behavior of the supplier insofar as it is the supplier who is prohibited from unilaterally terminating the contract under the assumption that a dealer (the perceived "small guy") can easily be bankrupted by the loss of a product line which in turn would serve to unjustly enrich the supplier (thus engorging the perceived "big guy"). By enacting the statute, the Puerto Rico legislature showed that it would no longer tolerate the many cases of big (mostly mainland) companies usurping the market infrastructure created by local entities who, in misreliance on the supplier's conduct, assumed they were establishing a long term distributorship. Traditional contract law doctrines offered insufficient recourse in these situations. However, the legislature did not intend that Law 75 be a safe-haven for dealers to avoid the express terms of the contracts to which they willingly subscribed, as is the case of the renewal notice requirement found in the instant contract.

It is important to keep in mind that this is not the typical Law 75 case⁴ since it does not involve questions such as whether or not a distribution contract existed; whether or not plaintiff was a distributor in fact; or if the supplier terminated the contract for just cause,⁵ etc. Rather, we are dealing here with the direct effect of the distributor, ASI's, conscious failure to provide Nike, the supplier, with written notice of renewal. Should we find that this failure to provide written notice is controlling, i.e., that ASI let the contract expire by its own terms, then we need not engage in any further Law 75 analysis—especially as to the issue of just cause—because, as already explained, Law 75 does not protect dealers or distributors from their own conduct which leads to a preconceived expiration of the distributorship.

Finally, whatever determination we make as to ASI would automatically overflow to Venrod since its agreement was completely subsidiary to ASI's. In other words, Venrod's agreement was born and will die with ASI's.

Validity...