V. Suarez & Co., Inc. v. Dow Brands, Inc.

• Decision Date: 21 July 2003
• Docket Number: No. 02-2470.,02-2470.
• Citation: 337 F.3d 1
• Parties: V. SUAREZ & CO., INC., Plaintiff, Appellant, v. DOW BRANDS, INC., Defendant, Appellee.
• Court: U.S. Court of Appeals — First Circuit

337 F.3d 1

V. SUAREZ & CO., INC., Plaintiff, Appellant, v. DOW BRANDS, INC., Defendant, Appellee.

No. 02-2470.

United States Court of Appeals, First Circuit.

Heard June 5, 2003.

Decided July 21, 2003.

Federico Calaf Legrand, with whom Horacio R. Subirá, Alejandro J. Cacho, and Reichard & Calaf, P.S.C. were on brief, for appellant.

Daniel F. Blonsky, with whom Ronald P. Weil and Aragon, Burlington, Weil & Crockett, P.A., were on brief, for appellee.

Before LYNCH, Circuit Judge, ARNOLD, Senior Circuit Judge,^* and HOWARD, Circuit Judge.

LYNCH, Circuit Judge.

This case involves the circumstances under which Puerto Rico Act 75 is intended to protect local dealers from termination of their distribution agreement in market withdrawal situations.

A manufacturer of household cleaning supplies, Dow Brands, sold a product line to another company and, as a result, terminated its relationship with Suarez, the local dealer/distributor of those products in Puerto Rico. The dealer sued, claiming a violation of Act 75, the Puerto Rico distributorship protection statute. We hold that the manufacturer's termination of the dealer relationship was with just cause, and we affirm the summary judgment dismissal of the case.

I.

A. Factual History

The following facts are uncontested by the parties. V. Suarez & Company, Inc. was a distributor of many household products in Puerto Rico, including over twenty products manufactured by Dow Brands, Inc., such as Fantastik, Glass Plus, Spray `N Wash, Pine Magic, Janitor in a Drum, Spray `N Starch, and Wood Plus. By 1990, its annual sales of Dow products exceeded $4 million.

For whatever reasons,¹ Suarez's sales of Dow products have decreased every year since 1992. In May 1995, a consulting company hired by Suarez recommended that it divest itself of several Dow products, and Suarez incorporated this concept into its corporate strategy for 1995 and 1996. In August 1996, Suarez stopped distributing a number of Dow products. By early 1998, Suarez distributed only three Dow products, all household cleaners: Fantastik, Glass Plus, and Spray `N Wash. At that time, its annual sales of these products were less than $1.1 million, out of total annual sales of more than $312 million. The Dow products Suarez distributed constituted only 0.35% of Suarez's total business. In the spring of 1997, Suarez was at least contemplating the idea of divesting itself of the remaining Dow products. In February 1997, it hired another consulting firm to perform a valuation of the Dow product line in order to "estimate the fair market value of the distribution rights ... for their possible sale."²

On October 27, 1997, Dow entered into an agreement to sell its worldwide consumer products business to S.C. Johnson & Son, Inc. The sale included the trademarks to, and the rights to produce and sell, the three Dow products Suarez was still distributing in Puerto Rico. S.C. Johnson did not agree to assume any distributorship agreements, including the one with Suarez.³ During the negotiations, Dow entered into a confidentiality agreement, as is common, which prevented it from disclosing its negotiations with S.C. Johnson until the sale was completed. The sale closed on January 23, 1998. That same day, Dow informed Suarez that it would no longer be able to provide products to Suarez for distribution because Johnson now owned the product line.

B. Procedural History

On April 7, 1999, Suarez filed suit against Dow in a Puerto Rico court. It alleged that Dow violated Act 75, the Puerto Rico distributor protection statute, which prevents acts "detrimental to the established relationship ... except for just cause." 10 P.R. Laws Ann. § 278a (1997). Dow removed the case to the federal district court on diversity grounds.

On August 30, 2001, after discovery, Dow filed a motion for summary judgment. Dow argued that the sale of its product line to S.C. Johnson constituted just cause for the termination of the distribution relationship with Suarez. On October 23, Suarez responded and filed its own summary judgment motion. On April 22, 2002, the district court granted Dow's motion and dismissed the lawsuit. V. Suarez & Co. v. Dow Brands, Inc., No. 99-1461(JAG), 2002 WL 731759, 2002 U.S. Dist. LEXIS 7880 (D.P.R. Apr. 24, 2002). Suarez timely appealed.

II.

A. Standard of Review

We review grants of summary judgment "de novo, construing the record in the light most favorable to the nonmovant and resolving all reasonable inferences in that party's favor." Rochester Ford Sales, Inc. v. Ford Motor Co., 287 F.3d 32, 38 (1st Cir.2002). We review a question of statutory interpretation de novo. Bryson v. Shumway, 308 F.3d 79, 84 (1st Cir.2002).

B. Act 75

Act 75 protects distributor contracts:

[N]o principal or grantor may directly or indirectly perform any act detrimental to the established relationship or refuse to renew said contract on its normal expiration, except for just cause.

10 P.R. Laws. Ann. § 278a. "Just cause" is defined in the statute as "nonperformance of any of the essential obligations of the dealer's contract, on the part of the dealer, or any action or omission on his part that adversely and substantially affects the interests of the principal or grantor in promoting the marketing or distribution of the merchandise or service." 10 P.R. Laws. Ann. § 278(d).

From a plain reading of the statute, it may appear that only action or inaction on the part of the dealer would provide just cause to allow a principal to terminate the relationship. But a plain reading of Act 75 would produce, in some situations, absurd and constitutionally suspect results. As a consequence, the courts have filled in other readings.

In Medina & Medina v. Country Pride Foods, Ltd. (Medina I), 825 F.2d 1, 2-3 (1st Cir.1987) (Breyer, J.), this court addressed a related question about market withdrawal and certified the question to the Puerto Rico Supreme Court. In doing so, we recognized a primary intention of the act. "Law 75 was intended to protect dealers who built up a market, from suppliers who wish to appropriate their established clientele." Id. at 2-3.⁴

This court certified the following question to the Puerto Rico Supreme Court:

Where there is a contract of indefinite time period, with price and credit terms left open to negotiation, and the parties negotiate in good faith but cannot reach an agreement as to price and credit, does Law 75 prohibit the supplier from unilaterally and completely withdrawing from the market, when the supplier makes no attempt to appropriate the dealer's good will or established clientele?

Medina I, 825 F.2d at 3. The Puerto Rico Supreme Court responded by explaining that "market withdrawal" may constitute just cause:

Act No. 75 of June 24, 1964, does not bar the principal from totally withdrawing from the Puerto Rican market when his action is not aimed at reaping the good will or clientele established by the dealer, and when such withdrawal — which constitutes just cause for terminating the relationship — is due to the fact that the parties have bargained in good faith but have not been able to reach an agreement as to price, credit, or some other essential element of the dealership. In any case, said withdrawal must be preceded by a previous notice term which shall depend on the nature of the franchise, the characteristics of the dealer, and the nature of the pretermination negotiations.

Medina & Medina v. Country Pride Foods, Ltd. (Medina II), 22 P.R. Offic. Trans. 172 (1988).

Medina II involved an indefinite term contract with price and credit terms left open to negotiation. After negotiating and reaching an impasse over key terms, the principal unilaterally withdrew from the market. Medina II, then, could be distinguished on several grounds from our situation. First, the Puerto Rico Supreme Court in Medina II sought to avoid a holding that there was no just cause under Act 75, because that would have meant an impairment of the parties' ability to change or bargain in good faith over the terms of the contract. Id. The present case, by contrast, does not involve withdrawal from the market for such reasons and so does not implicate those interests. Second, as best can be told, in Medina II there was no continued distribution of those products at all in Puerto Rico, and so no risk of unfair usurpation of the customer base and good will the distributor had built up.

In a more recent and more pertinent case, the Puerto Rico Supreme Court further clarified when a market withdrawal constitutes just cause. In Borg Warner International Corp. v. Quasar Co., 138 P.R. Dec. 60 (1995),⁵ the defendant principal, Quasar, stopped selling products to distributors; that business was transferred to a different division as part of a corporate reorganization by the parent company. The other division continued to distribute its goods in Puerto Rico through a chain of retailers and attempted to negotiate in good faith an agreement with plaintiff, but was unable to do so.

In this context, the Puerto Rico Supreme Court made two pertinent rulings. First, it held that a market withdrawal constitutes just cause if the defendant has withdrawn from the market and there was a breakdown in the negotiations over time; it matters not if others continue to sell the product in question. "The issue here is whether any of the defendants, taking advantage of the market created by [the plaintiff], has continued to sell [the product] in Puerto Rico...." The court looked only to the "defendants' business activity" and ignored allegations that the product at issue was still being sold in Puerto Rico through other channels. In a footnote, the court also quoted approvingly from a law review article which explained that "just cause" would be satisfied "if a large diversified company ... sold off all assets required for manufacture of a product line to a third party." S. Antonetti-Zequeira, A Different Opinion About "Just Cause", 58 Rev....