Court Opinion

ID: 2964250
Source: CourtListenerOpinion
Date Created: 2015-09-21 21:22:45.423147+00
Date Added: 2024-06-11T11:42:53.244432
License: Public Domain

USCA1 Opinion

	

                            UNITED STATES COURT OF APPEALS
                                FOR THE FIRST CIRCUIT
                                                     
                                 ____________________

        No. 95-2177

                            R. W. INTERNATIONAL CORP. AND
                             T. H. WARD DE LA CRUZ, INC.,

                                     Appellants,

                                          v.

                                  WELCH FOODS, INC.,

                                      Appellee.

                                                     
                                 ____________________

                     APPEAL FROM THE UNITED STATES DISTRICT COURT

                           FOR THE DISTRICT OF PUERTO RICO

             [Hon. Gilberto Gierbolini-Ortiz, Senior U.S. District Judge]
                                              __________________________

                                                     
                                 ____________________

                                        Before

                                 Cyr, Circuit Judge,
                                      _____________

                           Campbell, Senior Circuit Judge,
                                     ____________________

                              and Boudin, Circuit Judge.
                                          _____________

                                                     
                                 ____________________

             Jos  A. Hern ndez Mayoral for appellants.
             _________________________
             Gilberto J. Marxuach-Torr s,  with whom  Samuel T. C spedes,  Ana
             ___________________________              __________________   ___
        Matilde Nin, and McConnell Valdes were on brief for appellee.
        ___________      ________________

                                                     
                                 ____________________

                                    July 10, 1996
                                                     
                                 ____________________

                    CYR, Circuit Judge.   R.W. International Corp. and T.H.
                    CYR, Circuit Judge. 
                         _______ _____

          Ward  de la Cruz, Inc.  (collectively:  "R.W.")  appeal a summary

          judgment dismissing their claim  that Welch Foods, Inc. ("Welch")

          unilaterally terminated  its  dealership contract  with  R.W.  in

          violation  of the Puerto  Rico Dealers' Contracts  Act, P.R. Laws

          Ann. tit.  10,   278  ("Law 75").   We affirm the  district court

          judgment.

                                     BACKGROUND1
                                     BACKGROUND
                                     __________

                    Welch  is a  major fruit  juice manufacturer  which has

          sold its products in Puerto Rico since the 1930's through various

          local  distributors.  On March 25, 1988, Welch designated R.W. as

          its  new Puerto  Rico distributor  for frozen  juice concentrate.

          While the parties  continued to  negotiate the terms  of a  final

          dealership  contract, R.W. began  distributing Welch  products to

          over 500 retail stores throughout Puerto Rico.  

                    Prior to R.W.'s  designation as its  distributor, Welch

          had expressed  concern about  R.W.'s insistence on  continuing to

          distribute "Donald  Duck" frozen  juice concentrate,  a competing

          brand,  and on its plans  to begin distribution  of "Donald Duck"

          bottled juice products in  January 1989.  Consequently,  R.W. had

          agreed,  in  principle,  to  take various  measures  designed  to

          alleviate Welch's concerns, including a one-year trial dealership

                              
          ____________________

               1The  facts are stated in the light most favorable to appel-
          lant  R.W.  The  reader is referred to  our two earlier decisions
          for additional detail.  See R.W. Int'l Corp. v. Welch Food, Inc.,
                                  ___ ________________    ________________
          13 F.3d 478 (1st Cir.  1994); R.W. Int'l Corp., 937 F.2d  11 (1st
                                        ________________
          Cir. 1991).  

                                          2

          during which R.W.  would give Welch's  frozen juice product  full

          marketing  priority and  support, increase  Welch's sales  by 15%

          over 1987  sales figures, and  contribute $50,000 toward  a joint

          advertising promotion of Welch's juice products.  Notwithstanding

          their agreement in principle, final contract negotiations between

          the  parties immediately  and unexpectedly became  contentious in

          several peripheral  respects which  remained unresolved for  more

          than a year.2 

                    In  January 1989,  after  R.W.  began its  long-planned

          expansion of the "Donald Duck" distribution line to include  both

          frozen and bottled juices, Welch  employees noticed that (i) R.W.

          had included an advertisement  for Donald Duck frozen juice  in a

          supermarket "shopper" publication,  while omitting an  advertise-

          ment for Welch frozen juice; (ii) "on various occasions" R.W. had
                   _____

          stocked  Welch frozen juice on the bottom shelves of retail store
                   _____

          freezer cases, while placing Donald Duck frozen juice at customer

          eye-level;  and (iii)  R.W.'s average  monthly sales  figures for

          Welch products during January-February 1989 fell by approximately

          14% from its average monthly sales figures for 1988.3  
                              
          ____________________

               2The matters in contention included whether:   R.W. would be
          Welch's exclusive  Puerto Rico  dealer during the  one-year trial
          period; New York  or Puerto  Rico law would  govern any  contract
          dispute;  R.W. would  "assume"  the  "grandfathered" contract  of
          Welch's previous dealer, thereby avoiding application of Law 75.

               3During  the one-year  dealership relationship,  Welch juice
          sales were as follows:

               April 1988          1900 cases          $ 42,770
               May 1988            3060 cases          $ 70,354
               June 1988           2983 cases          $ 63,971
               July 1988           3005 cases          $ 64,056

                                          3

                    On  March 30,  1989,  Welch  discontinued the  yearlong

          contract negotiations and unilaterally terminated  R.W.'s dealer-

          ship.   Welch  pointed to  the "conflicts  of interest  of [R.W.]

          representing both competing lines  [i.e., Welch and Donald Duck],

          [which] are significant and irreconcilable, [and] [a]n  increased

          level of conflict in personal relations between [us]."

                    In  April 1989,  R.W. filed  this action  alleging that

          Welch's unilateral termination of the dealership violated Law 75,

          which provides: 

                    Notwithstanding the existence  in a  dealer's
                    contract of a clause reserving to the parties
                    the unilateral right to terminate  the exist-
                    ing relationship, no principal or grantor may
                    directly or indirectly perform any act detri-
                    mental [i.e., unilateral termination]  to the
                    established relationship or  refuse to  renew
                    said contract  on its normal  expiration, ex-
                                                              ___
                    cept for just cause.
                    ____ ___ ____ _____

          P.R.  Laws Ann. tit. 10,    278a (1976  and Supp. 1989) (emphasis

          added).   The district  court initially entered  summary judgment

          for Welch  on the ground  that Law 75  afforded no  protection to

          dealers  unless a  final,  written "dealer's  contract" has  been

          executed by the parties.  On remand following our vacation of the

                              
          ____________________

               August 1988         3093 cases          $ 66,983
               September 1988      2607 cases          $ 54,809
               October 1988        2866 cases          $ 61,022
               November 1988       2312 cases          $ 49,619
               December 1988       2587 cases          $ 55,220
               January 1989        2471 cases          $ 52,189
               February 1989       2284 cases          $ 48,687
               March 1989          2955 cases          $ 72,640

          Although  R.W. notes that sales figures  rebounded in March 1989,
          Welch made  its determination to  terminate contract negotiations
          before month-end.

                                          4

          district  court judgment, see R.W. Int'l, 13 F.3d at 486 (holding
                                    ___ __________

          that  the broad definition of "dealer's contract" in Law 75 would

          comprehend dealers actually engaging in  product distribution for

          a principal, albeit  only through a  course of dealing  preceding
                       ______

          the  execution of a final contract), Welch renewed its motion for

          summary  judgment.   It  contended that  the undisputed  evidence

          established that R.W.'s demonstrated conflict of interest consti-

          tuted  "just cause," under Law 75, for terminating their one-year

          dealership.    The  district  court once  again  entered  summary

          judgment for Welch and R.W. appealed.

                                     DISCUSSION4
                                     DISCUSSION
                                     __________

                    The Puerto  Rico Legislature  enacted Law  75 believing

          that traditional contract-law  principles had not afforded  local

          dealers  adequate  protection   from  arbitrary   dealer-contract

          terminations by larger, primarily mainland-based principals which

          normally enjoy a superior bargaining position.  See  Vulcan Tools
                                                          ___  ____________

          of P.R.  v.  Makita U.S.A.,  Inc.,  23 F.3d  564,  568 (1st  Cir.
          _______      ____________________

          1994).5   The Legislature  therefore prohibited a  principal from
                              
          ____________________

               4We will uphold a grant of summary judgment if the competent
          evidence discloses no genuine issue of material fact and Welch is
          entitled to judgment as a matter of law.  See Fed. R. Civ. P. 56;
                                                    ___
          Casas Office Machs.,  Inc. v.  Mita Copystar Am.,  Inc., 42  F.3d
          __________________________     ________________________
          668, 678 (1st Cir.  1994).  The materiality of any  disputed fact
          in genuine dispute is determined  through reference to the appli-
          cable  substantive law, in  this case, Law  75.  See  Anderson v.
                                                           ___  ________
          Liberty Lobby, Inc., 477 U.S. 242, 248 (1986).
          ___________________

               5The  statement of  motives in  Law 75  reads, in  pertinent
          part: "The Commonwealth of  Puerto Rico cannot remain indifferent
          to  the growing  number of  cases in  which domestic  and foreign
          enterprises, without just cause, eliminate their dealers, conces-
          sionaires  or agents, as soon  as these have  created a favorable

                                          5

          unilaterally  terminating an  established dealership  "except for

          just cause."  See P.R. Laws Ann. tit. 10,   278a.  Law 75 defines
                        ___

          "just cause"  as either "nonperformance  of any of  the essential
                           ______

          obligations  of the dealer's contract, on the part of the dealer,

          or any action or  omission on [the dealer's] part  that adversely
          __

          and  substantially  affects  the  interest of  the  principal  or

          grantor in promoting  the marketing or  distribution of the  mer-

          chandise or service."  Id.   278 (emphasis added).  
                                 __

                    Ultimately, "just cause" under Law  75 is a question of

          fact, see La Playa  Santa Marina, Inc. v. Chris-Craft  Corp., 597
                ___ ____________________________    __________________

          F.2d  1,  4 (1st  Cir. 1979),  as are  the subsidiary  issues (i)

          whether the  contracting parties considered  the particular  con-

          tract  obligation allegedly breached by  the dealer to be "essen-

          tial,"  see  Biomedical Instrument  and  Equip.  Corp. v.  Cordis
                  ___  _________________________________________     ______

          Corp., 797 F.2d 16, 18 (1st  Cir. 1986), see also PPM Chem. Corp.
          _____                                    ___ ____ _______________

          of P.R.  v. Saskatoon Chem.,  Ltd., 931  F.2d 138, 140  (1st Cir.
          _______     ______________________

          1991),  or (ii) whether  any other "non-breaching"  acts or omis-

          sions by  the dealer  were nonetheless sufficiently  egregious to

          have "adversely and substantially  affect[ed] the interest of the

          principal or  grantor in promoting the  marketing or distribution

          of the merchandise or service,"   Pan Am. Computer Corp. v.  Data
                                            ______________________     ____

          Gen. Corp., 652 F.2d 215, 217 n.2 (1st Cir. 1981);  La Playa, 597
          __________                                          ________

          F.2d at 3 (upholding  final judgment for dealer, despite  its two

          "minor" contract breaches).  Moreover, once a dealer demonstrates

                              
          ____________________

          market and  without taking  into account their  legitimate inter-
          ests." 

                                          6

          that its  principal unilaterally  terminated their  contract, the

          principal  must carry  the burden  of persuasion  on the  factual

          elements of the "just  cause" showing.  Newell Puerto  Rico, Ltd.
                                                  _________________________

          v. Rubbermaid Inc., 20 F.3d 15, 22 (1st Cir. 1994); La Playa, 597
             _______________                                  ________

          F.2d at 3-4.

                    R.W. does  not contest the historical  facts upon which

          Welch  based its  claim that  R.W. operated  under a  conflict of

          interest  adverse to  Welch's long-term  interests: R.W.'s  lower

          sales of  Welch products during January-February  1989, see supra
                                                                  ___ _____

          note 3; R.W.'s failure to include  a Welch sales promotion in  an

          issue of  a supermarket "shopper" which  carried an advertisement

          for  Donald  Duck's  competing  products;  and  its  "occasional"

          placement of  Welch products in freezer  positions less favorable

          and  less   consumer-friendly  than  the  Donald  Duck  products.

          Rather,  R.W. merely  argues that  divergent inferences  might be

          drawn  from  these undisputed  facts,  bearing on  the  issues of

          "essentiality" and "adversity" upon which Welch would be required

          to bear  the burden of proof  at trial, and  that these competing

          inferences generated  trialworthy issues not  amenable to summary

          judgment.6

                    Even conceding the reasonableness of any such competing

          inferences,  however, R.W.'s  protestation that  it committed  no
                              
          ____________________

               6For example,  the  parties  dispute  whether  their  mutual
          "contractual" commitment to  contribute $50,000 apiece to  adver-
          tise Welch frozen concentrate was to be performed during the one-
          year  trial period  following R.W.'s  March 1988  designation, or
          whether this commitment would accrue only during a one-year trial
          period  commencing  from  the  date a  final  written  dealership
          contract was signed.  

                                          7

          cognizable breach of "contract," or other act or omission  suffi-

          ciently  "adverse"  to  Welch's  business  interests  to  warrant

          termination,  would  not  preclude  summary judgment  for  Welch.

          Although  Law  75, by  its plain  terms,  makes the  "just cause"

          inquiry  turn solely on  the dealer's  actions or  omissions, see
                                       ________                         ___

          P.R. Laws Ann. tit. 10,   278,  the Puerto Rico Supreme Court has

          read a "third" "just  cause" into the statute to  avoid constitu-

          tional invalidation,  by holding  that a principal's  own circum-

          stances  may  permit its  unilateral  termination  of an  ongoing

          dealership, irrespective  of the dealer's conduct.   See Medina &
                                                               ___ ________

          Medina  v. Country Pride Foods,  Ltd., 858 F.2d  817, 822-23 (1st
          ______     __________________________

          Cir. 1988) (responding to  question certified in 825 F.2d  1 (1st

          Cir. 1987)). 

                    After the principal in Medina  unsuccessfully attempted
                                           ______

          in protracted  good-faith negotiations to adjust  its business to

          changed market conditions by renegotiating price and credit terms

          with its long-time  dealer, it decided to terminate  the dealer's

          contract, and  withdraw from the Puerto Rico market.  Id. at 818-
                                                                ___

          19.   The Medina court noted that an overly restrictive interpre-
                    ______

          tation of Law 75's "just cause" requirement could place a princi-

          pal in  a  serious  dilemma  under such  circumstances:    either

          capitulate to the  dealer's price  and credit terms  and be  held

          hostage in an interminable dealership relationship on disadvanta-

          geous terms,  or unilaterally  terminate the contract  and expose

          itself to  a costly lawsuit  under Law  75.   Id. at  822 &  n.4.
                                                        ___

          Where  the principal intends  to retire entirely  from the Puerto

                                          8

          Rico market, however, little  if any danger exists that  the sort

          of  exploitation proscribed by Law 75 can occur, since the retir-

          ing  principal  cannot  hope  to  appropriate  prospectively  the

          product goodwill created by its dealer in the Puerto Rico market.

          Id.  at  823.    Thus, where  the  principal  offers "reasonable"
          ___

          contract terms, but nonetheless arrives at a bona fide impasse in
                                                       ____ ____

          the negotiations,  barring unusual circumstances not present here

          Medina  ordains a determination  that there was  "just cause" for
          ______

          the unilateral dealership termination by the principal.  See id.;
                                                                   ___ ___

          see  also Borg Warner Int'l  Corp. v. Quasar  Co., No. CE-94-182,
          ___  ____ ________________________    ___________

          slip op. at 10 n.8 (P.R. Mar. 14, 1996) (Official Translation).

                    "Absent  controlling state  court precedent,  a federal

          court sitting in diversity  may . . . predict[] .  . . the course

          the state courts would take [if] reasonably clear."  VanHaaren v.
                                                               _________

          State Farm  Mut. Auto. Ins. Co.,  989 F.2d 1, 3  (1st Cir. 1993).
          _______________________________

          In  fact,  this  court predicted  earlier  that  upon remand  and

          further discovery Welch's  asserted reasons for terminating  R.W.

          might constitute "just cause" as enunciated in Medina: 
                                                         ______

                    [W]e fail  to see how applying Law  75 in the
                    circumstances of this case  necessarily would
                    require  Welch to continue  a relationship it
                    does not want  in a  manner to  which it  has
                    serious objections.  Law 75 simply requires a
                    supplier to justify its decision to terminate
                    a    dealership.        If    Welch's    con-
                    flict-of-interest  concerns  about  R.W.  are
                    legitimate, we have no  doubt that this would
                    constitute "just  cause" under Law 75.  . . .
                    Medina  &  Medina is  not precisely  on point
                    _________________
                    because it involved a supplier's  decision to
                    totally  withdraw from the Puerto Rico market
                    following good-faith negotiations that failed
                    to  achieve  agreement  between the  parties.
                    There is  no indication  here that  Welch in-

                                          9

                    tended to leave the market rather than find a
                    new  dealer.   Nevertheless,  we believe  the
                    principle  underlying Medina  & Medina  is e-
                                          ________________
                    qually  applicable  in  these  circumstances,
                    i.e., that a supplier  has just cause to ter-
                               _ ________  ___ ____ _____ __ ____
                    minate if it has  bargained in good faith but
                    ______ __ __ ___  _________ __ ____ _____ ___
                    has not  been able "to reach  an agreement as
                    ___ ___  ____ ____  __ _____  __ _________ __
                    to  price, credit,  or  some other  essential
                    __  _____  ______   __  ____ _____  _________
                    element of  the dealership."   This would  be
                    _______ __  ___ __________
                    true at least where,  as here, the supplier's
                    market  in Puerto  Rico was  well established
                    before  the  current dealer  relationship and
                    the supplier's action therefore "is not aimed
                    at reaping the good will or  clientele estab-
                    lished by the dealer." 

          R.W. Int'l Corp., 13 F.3d at 484 & n.4 (emphasis added).  
          ________________

                    Our discussion  did not  suggest that the  "good faith"

          inquiry  necessarily would  be amenable  to summary  judgment, of

          course.  Nonetheless, whereas the ultimate burden to  prove "just

          cause" under  the two-part statutory definition  resides with the
                                     _________

          principal  (i.e., Welch),  see Newell,  20 F.3d  at 22,  the bona
                                     ___ ______                        ____

          fides of contract negotiations must be presumed under Puerto Rico
          _____

          law.   See  Borg  Warner,  No. CE-94-182,  slip  op.  at 10  n.8.
                 ___  ____________

          Consequently,  at trial R.W.  would bear the  burden to establish

          Welch's  bad faith for purposes of the Medina "just cause" deter-
                                                 ______

          mination. 

                    R.W.  has not met its burden as a nonmoving party under

          Fed. R. Civ. P. 56.  See Celotex Corp.  v. Catrett, 477 U.S. 317,
                               ___ _____________     _______

          322 (1986) (if the nonmovant would bear the burden of  proof on a

          particular  issue  at trial,  its  failure  to adduce  sufficient

          evidence  to  demonstrate  its trialworthiness  warrants  summary

          judgment for the  movant); Smith  v. Stratus  Computer, Inc.,  40
                                     _____     _______________________

          F.3d  11, 12  (1st  Cir. 1994),  cert.  denied, 115  S.  Ct. 1958
                                           _____  ______

                                          10

          (1995).  As  R.W. proffered  no competent evidence  to rebut  the

          historical facts  relied on  by Welch  to justify  its unilateral

          termination      i.e.,  declining  sales figures,  the  "shopper"

          omission, or the  bottom-shelf freezer placements    we need only

          ask  whether a rational jury  could find mala  fides or unreason-
                                                   ____  _____

          ableness  on the  part  of Welch  in  determining that  R.W.  was

          representing conflicting interests. 

                    Even before  R.W.'s March 1988 designation,  Welch made

          clear that  it appreciated R.W.'s distribution  capabilities, but

          was  extremely wary of its  handling of Donald  Duck frozen juice

          concentrate and  of its plans  to begin distributing  Donald Duck

          bottled juice  in January 1989.   In order to get  the Welch con-

          tract,  Thomas Ward,  R.W.'s  president, agreed  to the  one-year

          trial  period,  the  sales-volume  commitments,  and  the  mutual

          advertising expenditures.   The parties understood  that the one-

          year  trial period would allow Welch to assess whether R.W. could

          distribute Donald  Duck products while meeting  its obligation to

          provide full  marketing support for  Welch products.   In January

          1989, however,  there were strong signals that  R.W. was shifting

          its  primary attention to its newly expanded Donald Duck line, at

          Welch's  expense.   Although R.W.  plausibly suggests  that these

          indicia were  either ambiguous,  anecdotal, or  aberrational, and

          that genuine factual issues  may well remain as to  whether these

          indicia  signaled  a  "contract"  breach  or  other  sufficiently

          "adverse"  action by R.W.  under P.R. Laws  Ann. tit.  10,   278,

          R.W.  has not shown that it was unreasonable for Welch, acting in

                                          11

          presumed good  faith, to interpret these signals  as portending a

          troubled business  relationship ahead,  and to withdraw  from it.

          Cf. Newell, 20 F.3d  at 23 (upholding verdict for  dealer because
          ___ ______

          principal  had known for twenty-three  years that dealer had been

          marketing  competing product).   Given that  Welch already  had a

          fifty-year presence  in the Puerto Rico  market before appointing

          R.W. in 1988, and that the parties reached a bona fide impasse on
                                                       ____ ____

          an  essential modification to the terms of their ongoing dealer's

          "contract" (i.e., whether R.W. would continue to handle competing

          product lines), we conclude  that a rational jury could  not find

          that Welch acted  in "bad faith."   Accordingly, summary judgment

          was proper.

                    The judgment is affirmed.
                    The judgment is affirmed.
                    ________________________

                                          12