* of the Eighth Circuit, sitting by designation.



# United States Court of Appeals

For the First C ircuit

No. 02-2470 V. SUAREZ & CO., INC., Plaintiff, Appellant,

v. DOW BRANDS, INC., Defendant, Appellee.

APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE

DISTRICT OF PUERTO RICO [Hon. Jay A. García-Gregory, U.S. District Judge ]

Before Lynch, Circuit Judge , Arnold, Senior Circuit Judge , * and Howard, Circuit Judge . 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 wh om Ronald P. Weil and Aragon, Burlington, Weil & Crockett, P.A. were on brief, for appellee.

July 21, 20031 Dow suspected that a large portion o f Su arez's sales were

due to products that were div ertedback to the United States for resale (a practice known as "diversion"). Suarez denies that it assistedor took part in this practice. To prevent further diversion, Dow increased the w holesa le prices of its products to -2- LYNCH, Circuit Judge . T his c ase 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.

Amanufacturer of household cleaning supplies, Dow Br ands, sold a product line to another company and, as a res ult , terminatedits 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 t hat 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 byDow 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 whate ver reasons, 1 Suarez's sales of Dow productsSuarez. The parties disput e wh o is to blame for the products'

resulting decline in sales, but the resolution of this dispute is not necessary to decide this case.

2 Suarez maintains that it ultimately decided against selling the distribution rights, another issue not material t o ou r decision. -3- have decreased every year since 1992. In May 1995, a consulting companyhired by Suarez recommended that it divest its elf of several Dowproducts, and Suarez incorporated this concept into its corporate strategy for 1995 and 1996. In August 1996, Suarez stoppeddistributing 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 Dowprod ucts Suarez distributedconstituted only0.35% of Suarez's total business. In the spring of 1997, Suarez was at least contemplating the idea of divesting itself of the remainingDow products. In February 1997, it hired another consulting firm to perform a valuation of the Dow product line in order to "esti mate the f air 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 busin ess to S.C. Johnson & Son, Inc. The sale included the trademarks to, and the rights to pr odu ce and sell, the three Dow products Suarez was still distributingin Puerto Rico. S.C. Johnson did not agree to assume3 There is no evidence that Suarez was treated anydifferently

than other Dow distributors. -4- anydistributorship agre emen ts, including the one with Suarez. 3 Duringthe negotiations, Dow ente redinto a confidentiality agreement, as is comm on, which prevented it from disclosing its negotiations with S.C. Johnson until the sale was completed. The sale closed on January 2 3, 1998. That same day, Dow informed Suarez that it would no longer be able to prov ide produ cts 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 respondedand filed its own summary judgment motion. On April 22, 2002, th e district court granted Dow's motion and dismissed the lawsuit. V. Suarez & Co. v. Dow Brands, Inc. , No. 99-1461 (JAG), 2002 U.S. Dist. LEXIS 7880 (D.P.R. Apr. 22, 2002). Suarez timely-5-

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 resolvingall 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 indi rectl y performany act detrimental to the established relationship or refuse to re new 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 obligatio ns of the dealer's cont ract, 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 onlyactio n or inaction on the part of the dealer would provide just cause to allow a principal to terminate the relationship. But

a plain readingof Act 75 would produce, in some situations, absurd4 The legislative history of Act 75 makes explicit this

intent: The problem of the dea ler ship system in Puerto Rico has worsenedas of late because of the ill-timed action of domestic and foreign manufacturers who, without ju st c ause, terminate their relationship with their representatives and agents in Puerto Ric o as soon as the latter have created a favorable market for their products, thus frus trati ng the legitimate expectations and interests of those who so efficiently carried out their responsibilities. 18 Diario de Sesiones 1531 (196 4), cited in Medina & Medina v. CountryPride Foods, Ltd. ( Medina II ), 22 P.R. Offic. Trans. 172 (1988).

-6- andconstitutionally 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 addresseda related question about market withdrawal and certified the question to the Puerto Rico Supreme Court. In doing so, we recognizeda 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 andcredit terms left open to negotiation, and the parties negotiate in good faith but cannot reach an agreement as to price and credit, d oes La w 75 prohibit the supplier from unilaterally and completely withdrawing fromthe market, when the supplie r make s no attempt to appropriate the dealer's good will or established-7- 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 fromtotally withdrawing from th e Puerto Rican market when his action is not aimed at reaping the good will or clientele established by the dealer, and wh en suc h 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 , o r some other essential element of the deale rshi p. In any case, said withdrawal must be preceded by a previous notice term which shall depend on the na ture o f 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

rea chingan impasse over key terms, the principal unilateral l y withdrewfrom 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, beca use that would have meant an impairment of the parties' ability to change or bargain in good f aith over the terms of the contract. Id. The present case, b y 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 distribut ion o f5 The English translation of this case has not yet been

reported. However, the case has been officially translated, and so we rely on the official but unpublished translation. -8- 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 C ourt further clarified when a market withdrawal constitutes just cause. In Borg Warner International Corp. v. Quasar Co. , 138 P.R. D ec. 60 (1995), 5 the defendant principal, Quasar, stopped selling products to distributors; that business was transferredto a different divisio n as p art of a corporate reorganization by the parent company. The other division continued to distribute its goods in Puerto Rico through a chain of retailers andattempted to negotiate in good fai th 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 andthere 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 ' b usin ess activity" and ignored allegations that the-9-

product at issue was still being sold in Puerto Rico through other channels. In a footnote, the court also quoted approvinglyfrom a law re view 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. Jur. U.P.R. 625, 632 (1989), cited approvingly in Borg Warner , supra . Second, the court in B org Wa rner excused lack of prior notice in some circumstances. The court explained that the "cardinal purpose of the Medina previous notice term is to allow the dealer to . . . prepare for the effects said withdrawal could have on his b usiness operations." In Borg Warner , no notice had been given because the principal did not plan to terminate the relationship; it was the distributor who walked away from negotiations.

Again, there are distinctions between Borg Warner and the present case. Borg Warner could be read as only a variant of Medina II : in both instances the termination of the dealership relationship with plaintiff was occasioned by the failure of good faith negotiations to produce an agreement. But Borg Warner also extendedthe just cause definition in two senses: it found just

cause even when the product line continued to be distributed in P uerto Rico, and it dispensed with prior notice in circums tance s6 Act 75 gover ns all dealer-principal relations. Many cases

interpretingAct 75 have foc used on the statutory definition of "dealer," which the Puerto Rico Supreme Court has described as "verysketchy." San Juan Mercantile Corp. v. Canadian Transp. Co. , 8 P.R. Offic. Trans. 218, 220 (1978); see A.M. Capen's Co. v. Am. Trading & Prod. Corp. , 202 F.3d 469, 473-75 & n.8 (1st Cir. 2000) (finding that plaintiff is not a dealer under the meaning of the statute); Euromotio n, In c. v. BMW of N. Am., Inc. , 136 F.3d 866, 871 (1st Cir. 1998) (same).

7 The distribution contract itself sets no term requiring Dow to continue distributing the products to Suarez. Plaintiff's argument by analogy to Puerto Rico law on leases fails.

8 Suarez also argues the district court erred in not certifying the question to the Puerto Rico Supreme Court. Suarez has waived the argument. Not only did it not ask the district court to certify the question, it asked the district court to enter summary judgment in its favor. We decline the belated invitation -10- where the principal's legitimate corporate reasons, totally independent of the plaintiff dealer, made giving notice to the dealer unreasonable.

This case is admittedly differen t on i ts facts and not directly controlled by precedent. C. Analysis

It is uncontested that Suarez had a dealership arrangement with Dow. 6 Once Suarez has shown that the contract was terminated, Dow has the burden of persuasion to show just cause. R.W. Int'l Corp. v. Welch Foods, Inc. , 88 F.3d 49, 52 (1st Cir. 1996). Dowsays it has just cause because it has withdrawn from the market and no longer sells the products at all. 7 Suarez has three primary arguments 8 against Dow's showing of just cause.to certify. -11-

First, Suarez argues, this is not a market withdrawal because the products continue to be sold in Puerto Rico, albeit not by Dow. Second, there was no negotiation in good faith, as required by Medina II . Third, there was no advance notice to Suarez. We consider these in turn and find none persuasive.

Sua rez first argues that it is within the scope of statutoryprotection that this court identif ied in Medina I : protection of dealers from the appropriation of their established clientele by suppliers. Suarez says that Dow appropriated its good will and established clientele when it sold its household product line to S.C. Johnson. Because of its efforts in distributingthese products in Puerto Rico, plaintiff argues, Dow was able to fetch a higher price for the product line. The district court correctly foundthat Suar ez had not presented evidence that Dow was attemptingto take advantage of or profited from the good will and clientele Suarez had developed. Importantly, Suarez does not allege that Dow at any time acted in bad faith.

From Borg Warner , we know that mere continuation of distribution of t he product in the market does not mean that the defendant principal did not have just cause. To put it differently, the statute is not necessarily violated if there is an opportunityto trad e on the good will built up by the plaintiff. In some senses, this is a stronger case for the defendant than Borg9 It is debatable whether there would be any benefit and, even

if so, whether the benefit is fairly attrib utable to Suarez's activity. There is no evidence either way. -12- Warner ; here the other entity is unrelated to the defendant, who

was the original principal. With related entities there may be more opportunity for mischief.

Further, the opportunity to trad e on g ood will in this situation is limited. As in Borg Warner , the new principal supplier, her e S.C. Johnson, presumably already has a set of dealers in its distribution network for its products and wishes to

use those dealers. Suarez may have the opportunity to negotiate a distributorship agreement with S.C. Johnson. Importantly, this is not an instance in which the defendant, here Dow, benefits by substitutingitself for its dealer which has built up the brands in the Puerto Rico market. There is none of the unfairness, caused by

a principal and fromwhich the principal benefits, that Act 75 was meant to prevent. True, S.C. Johnson may hypothetically gain some benefit from Suarez's activity, 9 but that is not th e ill that the statute was intendedto address. This case is in sharp distinction to the benefit to principals, unfairly gained, that Act 75 was meant to counter.

Amore significant question is raised by Suarez's second argument. Both Medina II and Borg Warner inv olv e "market withdrawals" occasionedby the failure of plaintiff dealers and the principal (or substi tuted principal) to come to terms after good-13-

faith negotiations. The requirement of negotiation in good faith "doubtlessly seeks to prevent unfair practices by a more powerful companyand thus protect the dealer who is in a state of defenselessness and who has no 'bargaining power.'" Borg Warner , supra . "[T]he negotiations of the principal will be considered to be made in good faith only if the terms he offers to the dealer are reasonable." Id.

Here, Dow never negotiated with Suarez because there was nothing to negotiate; Dow wished to remove itself from the business of manufacturing andselling these products entirely, including in Puerto Rico. The Puerto Rico Supreme Court has not made explicit whether the negotiation requirement applies in these circumstances. Our conclusion is that the Puerto Rico Supreme Court would not require such prior negotiation. We have several reasons.

Primarily, a requirement of negotiation with the plaintiff dealer in these circumstances would not serve the statute's main interest: prevention of unfair usurpation by the principal of the distributor's hard-won clientele and goodwill. Further, it would lead to unintended and unfortunate consequences. Such a result would be directlycontrary to two stated purposes of the statute: encouraging a level playing field and not creating new power in the dealer. One purpose of the Act i s to "level the contractual conditions between two groups." Walborg Corp. v. Su peri or Court , 104 P.R.R. 258, 265 (1975). In Medina II , the10 Ther e are se veral sources of dealer leverage in the Act.

One is the potential damages in an Act 75 suit, which may include expendedcosts and the value of the dealer's good will. 10 P.R. Laws Ann. § 278b. Damages under Act 75 would be essentially a hidden cost of the transaction; if multiplied by many dealers' actions, those damages would be particularly difficult to quantify or predict, adding great uncertainty. In addition, Act 75 permits the dealer to obtain a preliminary injunction to force the defendant principal to continue the dealership relationship. Id. § 278b-1; see Systema de Puerto Rico, Inc. v. Interface Int., Inc. , 23 P.R. Offic. Trans. 379 (1989). The statutory provision for preliminary injunctive relief neither specifies nor forbids that the dealer show a likelihood of success on the merits, 10 P.R. Laws Ann. § 278b-1, and the case law appears to be divided on whether there is such a requirement. See Luis Rosario, Inc. v. Amana Refrigeration, Inc ., 733 F.2d 172, 173 (1st Cir. 1984); Cobos Liccia v. DeJean Packing Co. , 24 P.R. Offic. Trans. 896 (1989); Systema de Puerto Rico, Inc. , supra .

11 That result is even harder to justify wher e the pl aintiff dealer plays a rather minimal role in the principal' s over all distributor network, such as Suarez does here. The Puerto Rico market constituted only 0.14% of Dow's worldwide sales. -14- Puerto Rico Supreme Court explained that Act 75 should not be construed"in such a way th at the dealer would govern -- by imposing his conditions -- the principal's sales policies, or vice versa, with the inevitable loss of the financial and legal autonomy of both." Medina II , supra .

Here, eith er ne gotiation would be meaningless or the plaintiff dealer wouldacq uire leverage it would not otherwise possess. 10 This latter effect would create a new imbalanc e of pow er , making the entirely legitimate and unrelated corporate interests of the principal in divesting itself of a product line subject to the interests of dealers. 11 To read the Act to require such a result could discourage national and multinational companies-15-

fromentering into distributorship agreements subject to Act 75 in Puerto Rico.

Further, the Puerto Rico Supreme Court has indicated that it would agree with our reasonin g. The Bo rg Warner court cited with approval the law review article by Antonetti-Zequeira that took the position that Act 75 would not require compensation if a companysold off the ability to manufacture a product as part of a corporate reorganization. Puerto Rico is a civil law jurisdiction and follows the rule of such jurisdictions of heavier reliance on learnedcommentators than common law jurisdictions. See J.H. Merryman, The Civil Law Tradition 56-57 (2d ed. 1985) ("The civil lawis a law of the professors. . . . The common law is still a law of the judges."). Third, Suarez argues that Dow's withdrawal fromthe market did not constitute "just cause" because no notice was given. Borg Warner made clear that in some circum stance s, notice could be excused. In that case, notice was excused because the principal hadno intention of terminating the relationsh ip u ntil the negotiations fell through. Here, Dow knewwell in advance that it would be ending the distributorship arrangement with Suarez if it

con summatedthe deal with S.C. Johnson, but due to a confidentialit yclau se in the purchase agreement it was bound to silence. W e a re doubtful that Puerto Rico law would impose any-16-

notice requirement at all for the same reasons there can be market withdrawal in these circumstances without negotiation. Admittedly,

a notice requirement, even without a negotiation requirement, is of benefit to the dealer and is arguably less intrusive into the internal corporate affairs of the principal, but it is still a weightyintrusion. Since we sit in di versity, predicting the development of local law, we choose to decide the issue on narrower fact-based grounds.

The purpose of the not ice re quirement "is to allow the dealer to find out well in advance about the principal's intention to withdraw from the market so that he can prepare for the effects saidwithdrawal could have on his b usines s operations." Borg Warner , supra . The importance of the notice requirement depends on the relationship between the dealer and the principal:

The less lines a dealer represents, the greater his reliance on each line he sells, and thus the greater the importance of the previous not ice. . . . [T]he termination o f a contract that only represents a small fract ion of the dealer's business will not seriously throw his business off-balance, hence the importance of the previous notice shall be less. Id. Also to be considered are "the age of the ties broken by the dealer, the market conditions of t he s pecific commercial sector, andhis relationship with other suppliers and with the clientele of the withdrawing product." Medina II , supra .

On the facts here, Suarez cannot establish a notice requirement. When Dow terminated the dealer contract, Suarez's-17-

annual sales for the three products were less than $1.1 million, out of total annual sales of $312 million; the Dow products constitutedabout 0.35% of Suarez's total business. Suarez was at

one t ime contemplating abandoning the Dow products altogether. Thus, there was little reliance by Suarez on this line of business, andthere was littl e Suarez c ould have done to prepare for this termination hadit received advance notice fromDow. We find that

on these facts, advance notice was not required, and Dow's failure to notify Suarez is not a bar to a finding of ju st c ause for the contract termination.

Suarez's counsel have ably argued their client's cause. Nonetheless, Dow's termination of the dealership relationship with Suarez, precipitated by Dow's sale of the product line, constituted just cause. III.

The district court's grant of summary judgment to the defendant is affirmed . Costs are awarded to Dow.