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Act 75 of June 24, 1964, 10 L.P.R.A sec. 278 et seq., protects distributors from termination, nonrenewal, or impairment of the established distribution relationship unless the supplier has "just cause" for such actions as defined in the statute. In the absence of "just cause," courts are empowered to grant substantial monetary compensation as well as preliminary injunctive relief. "Impairment" includes any detrimental act short of termination such as, for instance, the breach of any exclusivity right that the distributor might have.
In Medina & Medina v. Hormel Foods, 840 F.3d 26 (1st Cir. 2016), the First Circuit had to decide whether the course of dealings between the parties would provide enough evidence to conclude that a distribution agreement was "airtight" exclusive insofar as there was no written agreement between the parties. The distributor alleged that the commercial relationship between the parties was "airtight" exclusive, that is, it even barred sales to Puerto Rico customers by third parties located outside Puerto Rico.
The Court held that a distributor has the burden of proving the allegation of "airtight" exclusivity. If it fails to prove such an allegation, it would not be able to switch to mere exclusivity during or after trial. In Medina, the distributor alleged "airtight" exclusivity, but was unable to prove it because there had been instances in which stateside third parties sold product to customers in Puerto Rico and the supplier had written to the distributor stating that the distributor had no right to demand that such sales stop. The statute of limitations under Act 75 is three years. More than three years had elapsed since the clearest written communication by the supplier on the subject had been sent to the distributor. Thus, the claim under Act 75 based on "airtight" exclusivity was time barred.
During and after trial, the distributor tried to change its tune and argue that its distributorship was at least merely exclusive, that is, the supplier could not appoint other distributors based in Puerto Rico although it was not obligated to stop stateside third parties from selling to Puerto Rico customers. The Court did not take the bait.
This case illustrates the need to have a written agreement that clearly spells out the contours of any exclusivity conferred upon the distributor including whether any such exclusivity bars sales into Puerto Rico by third parties located outside Puerto Rico. Merely using the word "exclusive" is not enough to convey the limits, if any, of the supplier's obligation to protect the distributor from intrabrand competition. Lack of specificity or clarity permits the courts to impose their own unpredictable conclusions about the contours or limits, if any, of any alleged exclusivity right in dispute.
Of course, the best option, if possible, is to have a nonexclusive agreement which affords greater flexibility to appoint other distributors in case the original distributor fails to adequately develop the market.
Finally, the First Circuit in Medina reaffirmed the rule established in Basic Controllex v. Klockner Moeller Corp., 202 F. 3d 450, 452-453 (1st Cir. 2000) to the effect that the limitations period to file an Act 75 claim starts to run when the distributor is put on notice of the termination, nonrenewal or detrimental act such as, for instance, when the supplier informs the alleged exclusive distributor that it will sell to other distributors who, in turn, resell to Puerto Rico customers.
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