Lessons for Manufacturers and Dealers in Federal Court’s Denial of Request for Injunction Under Dealership Statute
The U.S. District Court for the District of Puerto Rico has recently ruled on a case dealing with Puerto Rico’s Dealer’s Contracts Act, also known as Law 75. Law 75 prohibits principals or suppliers from impairing their contracts with dealers without just cause, including arbitrary termination of a contract after a dealer has created a market for the products at issue. In Jose Santiago Inc. v. Smithfield Foods, Inc., the Court ruled in favor of the defendant manufacturer, Smithfield, after the plaintiff dealer, Santiago, brought suit complaining that Smithfield breached the exclusivity provision of their distribution agreement.
In 1995, Santiago entered into a distribution agreement with Farmland Foods, which later became part of Smithfield. Santiago remained the exclusive distributor for Farmland products. Santiago would later contend that Smithfield promised that it would remain the exclusive distributor not only for Farmland products but also for all of Smithfield’s products, too. Smithfield disputed this allegation.
In May 2020, Smithfield informed Santiago that Smithfield would be consolidating its Farmland brand with Smithfield products and that another distributor in Puerto Rico, Ballester Hermanos, Inc., would have the right to sell Smithfield products. In a cease-and-desist letter, Santiago charged Smithfield with violating its right to be the exclusive distributor of all Smithfield products in Puerto Rico. Smithfield countered that, at best, Santiago was the exclusive distributor for Farmland products only. Smithfield offered Santiago a non-exclusive distributorship for Smithfield products. Santiago rejected the offer.
Santiago filed suit claiming Smithfield had threatened to stop supplying Santiago with Smithfield products unless it agreed to the non-exclusive distributorship it had previously rejected. Santiago sought an injunction to stop Smithfield from terminating its supply of products, claiming it would suffer irreparable harm without access to Smithfiled products. In spite of Santiago’s pleading on what kind of harm it stood to suffer, Law 75 actually only requires that a court consider the interests of the parties and the statute’s public policy.
As a threshold matter, the Court held that Santiago was a dealer entitled to the protections of Law 75. Prior court decisions have laid out factors to consider in determining whether an entity is a dealer under Law 75: Does the alleged dealer promote products, maintain inventory, establish prices, extend credit, advertise or purchase products, maintain facilities, or offer services related to the products it sells? The Court held that Santiago was a dealer because it performed many of these functions.
Next, because Law 75 only came into play if a supplier was threatening a dealer’s contractual rights, the Court turned to whether a relevant agreement existed between the parties. While Santiago did have a contract to be the exclusive dealer of Farmland products, there was no such agreement for the distribution rights for Smithfield products. Indeed, Smithfield had offered terms for one, but Santiago had rejected them.
The Court further observed the parties’ course of dealing could themselves establish a contractual relationship for the right to exclusive distribution of Smithfield products, but here the Court held the parties’ dealings did no such thing. The parties’ relationship bore none of the hallmarks of an exclusive distribution arrangement: There was no minimum product volume Santiago had to purchase, any minimum volume Smithfield had to sell, or any obligation on the part of Santiago to order anything at all, or likewise for Smithfield to sell.
Finally, the Court held that Smithfield was not operating in bad faith. It undertook consolidation of the Farmland brand to eliminate redundancy. Smithfield had offered exclusive distribution rights to Santiago, albeit not over as many products as Santiago wanted. Thus, Santiago lacked an exclusive distribution arrangement with Smithfield for all of its products because the parties had reached an impasse in their negotiations over such an agreement. On these grounds, the Court denied Santiago’s request for injunction requiring Smithfield to fulfill Santiago’s product orders.
Jose Santiago Inc. v. Smithfield Foods, Inc. is an example of a court’s common-sense reading of an applicable dealer statute. It emphasizes the importance of agreements with clear terms and the danger in relying on a course of dealing through which to enforce alleged contractual rights.
This article was written with the assistance of summer associate Sophia Pfander.