Court Opinion

ID: 198916
Source: CourtListenerOpinion
Date Created: 2011-02-07 04:02:28+00
Date Added: 2024-06-11T12:06:48.129452
License: Public Domain

United States Court of Appeals
                      For the First Circuit

No. 99-1447

                 CARIBE INDUSTRIAL SYSTEMS, INC.,

                       Plaintiff, Appellant,

                                v.

               NATIONAL STARCH AND CHEMICAL COMPANY,

                       Defendant, Appellee.

           APPEAL FROM THE UNITED STATES DISTRICT COURT

                  FOR THE DISTRICT OF PUERTO RICO

         [Hon. Juan M. Perez-Gimenez, U.S. District Judge]

                              Before

                       Lynch, Circuit Judge,

                 Campbell, Senior Circuit Judge,

                   and O'Toole, District Judge.*

     Eric Perez-Ochoa, with whom Anabelle Rodriguez Rodriguez and
Martinez Odell & Calabria were on brief for appellant.
     Jaime E. Toro-Monserrate, with whom McConnell Valdes was on
brief for appellee.

     *Of the District of Massachusetts, sitting by designation.
                                   May 8, 2000

            CAMPBELL, Senior Circuit Judge.                  Plaintiff-appellant

Caribe Industrial Systems Inc. (“Caribe”) sued its principal,

defendant-appellee          National     Starch        and     Chemical     Company

(“National”), under the Puerto Rico Dealer’s Act.                   The district

court dismissed Caribe’s complaint for failure to state a claim,

holding    that     National   did    not     violate    the    Dealer’s    Act    by

selling      goods        directly     to      Checkpoint        Systems,      Inc.

(“Checkpoint”), a company with which Caribe had been dealing.

We affirm the decision below, although on different grounds than

those stated by the district court.

I.     BACKGROUND

            In its complaint, Caribe alleges the following facts:

National manufactures adhesive products, which are sold through

a network of distributors.           Caribe is a Puerto Rican distributor

that    markets     and    sells   industrial     packaging       machinery       and

materials, including adhesive products.

            On August 1, 1983, Caribe and National entered into a

written      Distributor       Agreement       (“the     Agreement”),       wherein

National    agreed     to   supply     and    Caribe    agreed    to   distribute

certain adhesive products in a designated territory.                         Caribe

agreed to be a “non-exclusive” distributor of National’s product

                                        -2-
line in Puerto Rico.        The Agreement provided in Article 2 that

“Distributor’s territory shall be non-exclusive territory.”2 The

Agreement    further      provided,     in    Article   7,    that   “National

reserves    the   right    to   sell    the    Products      directly   to   its

customers.”       Notwithstanding the non-exclusivity provisions,

Caribe was the sole distributor of National’s products in Puerto

Rico for approximately fourteen years.

            Beginning in 1993, Caribe sold National’s “hot melt”

adhesive products to Checkpoint.              Caribe obtained Checkpoint’s

business through its promotional and marketing efforts, and its

sales to Checkpoint represented approximately sixty percent of

Caribe’s total sales of adhesives.            In December 1996, Checkpoint

and Caribe executed an open-ended purchase order that terminated

in December 1997.

            In or around March of 1997, Checkpoint informed Caribe

that it intended to locally manufacture the hot melt adhesives

that it had been purchasing from Caribe.                Caribe attempted to

dissuade Checkpoint from doing so.            On or around March 26, 1997,

    2The Agreement was attached as an exhibit to Caribe’s
complaint in this action, and so we consider it incorporated by
reference. Although the parties mention other documents beyond
the complaint and Agreement, the district court apparently did
not consider any such materials, and nor will we. See Fed. R.
Civ. P. 12(b); 5A Charles Alan Wright and Arthur R. Miller,
Federal  Practice   and  Procedure   §   1366  (2d   ed.  1990)
(consideration of matters outside pleadings converts Rule
12(b)(6) motion into summary judgment motion).

                                       -3-
Caribe met with Checkpoint to “discuss the situation and to

attempt    to     discourage       [Checkpoint]             from      manufacturing           the

products.”        Checkpoint       stated     at    this         meeting        that    it    had

already ordered equipment to manufacture the adhesives.                                  Hence,

Caribe and Checkpoint were unable to reach agreement.

            Caribe        notified       National           of   Checkpoint’s           plans.

National    initially       expressed       skepticism             as   to      Checkpoint’s

ability to manufacture its own adhesives.                          Together, Caribe and

National “attempted to seek economically viable alternatives

that     would     convince        Checkpoint           not      to     engage         in     the

manufacturing of hot melt adhesives. . .”                           In or around April

1997, National told Caribe that in response to Checkpoint’s

actions, it wished to lower its prices.                            Caribe responded by

offering    to    reduce     its     profits       to       make    its      products        more

economically       attractive       to     Checkpoint,           and    to      exclude      the

Checkpoint account from the distributorship arrangement. Caribe

drafted and sent a “Memorandum of Understanding” to National

setting    forth    these     proposals.           National           rejected         Caribe’s

proposals,       asking    Caribe     to    take        a    larger       cut    in     profits

instead.     Caribe refused to do so.

            National and Checkpoint met in May, 1997, to discuss

Checkpoint’s announcement that it would be making adhesives in-

house.    At this time, National became convinced that Checkpoint

                                           -4-
indeed had the capacity to manufacture its own adhesives.                    On

June 26, 1997, National told Caribe that it had met privately

with Checkpoint earlier that month.               At that meeting, National

and Checkpoint had agreed that instead of manufacturing the

adhesives     itself,      Checkpoint     would   buy   them   directly    from

National, omitting Caribe from the distribution chain.

             In June, 1997, Checkpoint told Caribe that effective

June   30,   1997,    it    would   be   buying   materials    directly    from

National without an intermediary.              Checkpoint agreed, however,

to honor a ninety-day cancellation clause in the open-ended

purchase order.           On July 25, 1997, Checkpoint sent another

letter “officially” terminating the purchase order.               Checkpoint

bought hot melt adhesives directly from National beginning in

September or October, 1997.

             On September 29, 1997, Caribe filed a complaint in the

federal district court for the District of Puerto Rico against

National, seeking damages and provisional relief pursuant to the

Puerto Rico Dealer's Act of June 24, 1964 ("Law 75"), P.R. Laws

Ann. tit. 10, § 278 et seq.               Caribe contended that National

violated     Law     75    by   performing     acts     detrimental   to    the

established relationship between the parties by setting up its

own distribution system directly with Checkpoint.

                                         -5-
            On October 29, 1997, National filed a motion to dismiss

for failure to state a claim pursuant to Fed. R. Civ. P.

12(b)(6).        National contended that it did nothing wrong by

entering     a     direct     relationship          with     Checkpoint,            because

Checkpoint had already terminated its customer relationship with

Caribe and the Agreement was non-exclusive.                     Caribe opposed the

motion to dismiss and amended its complaint to add a cause of

action      for     tortious       interference            with      a        contractual

relationship.

            On     February      23,   1999,      the   district         court      allowed

National’s        motion    to   dismiss,         although     based         on    somewhat

different reasoning than that advanced by National.                               See Caribe

Indus. Sys., Inc. v. National Starch & Chem. Co., 36 F. Supp. 2d

448 (D.P.R. 1999).            It characterized the issue before it as

“whether a non-exclusive distribution agreement under Law 75,

although flexible to allow multiple distributors, nevertheless

forbids the principal from supplying its products directly to

the customers of its own distributors.”                            Id. at 450.            It

concluded that no cause of action lies under Law 75 where a

principal    sells     directly        to   a     customer    of    a       non-exclusive

dealer.     The district court also held that Caribe did not state

a   claim    for      tortious         interference          with       a    contractual

relationship.        Caribe appeals.

                                            -6-
II          DISCUSSION

            We apply “a de novo standard of review to a district

court's allowance of a motion to dismiss for failure to state a

claim.”      New   England    Cleaning   Servs.,   Inc.   v.   American

Arbitration Ass'n, 199 F.3d 542, 544 (1st Cir. 1999) (citation

omitted).    Caribe contends that the district court incorrectly

applied Rule 12(b)(6) in that it failed to take as true the

allegation that Checkpoint was Caribe’s customer, not National’s

customer.    In Caribe’s view, this distinction made it improper

for National to sell directly to Checkpoint, notwithstanding the

Agreement’s non-exclusivity. Caribe contends that the provision

in Article 7 stating that “National reserves the right to sell

the Products directly to       its customers” (emphasis supplied)

should be read as limiting National’s sales to those who are not

the customers of its distributors.       In support of that argument,

Caribe suggests that Checkpoint remained its customer even after

Checkpoint announced its intention to discontinue purchasing

product from Caribe.         Caribe further argues that the court

misapplied controlling case law in concluding that National did

not perform any acts detrimental to the established relationship

between the parties.

            Puerto Rico's Law 75 governs the business relationship

between principals and the locally appointed distributors who

                                  -7-
market their products.            See Irvine v. Murad Skin Research Labs.,

Inc., 194 F.3d 313, 317-18 (1st Cir. 1999).                            In order to avoid

the        inequity     of     arbitrary       termination             of    distribution

relationships once the distributor has developed a local market

for the principal's products or services, Law 75 limits the

principal's ability to unilaterally end the relationship except

for "just cause."            P.R. Laws Ann. tit. 10, § 278a.                  In 1966, the

protection afforded to distributors under Law 75 was extended to

include       the     conduct    of    a    principal        “detrimental          to     the

established         relationship,”         even    where     the       contract    was    not

terminated.         See id.; see also Irvine, 194 F.3d at 317-18.

               In   the      present   case,       National        did      not   terminate

Caribe’s status as a distributor of its products.                                 The sole

issue is whether National engaged in conduct detrimental to the

distribution relationship.             See P.R. Laws Ann. tit. 10, § 278a.3

“The       question    whether    there      has    been     a    ‘detriment’       to    the

existing       relationship       between         supplier       and     dealer    is    just

another way of asking whether the terms of the contract existing

between the parties have been impaired.”                     Vulcan Tools of Puerto

Rico v. Makita U.S.A., Inc., 23 F.3d 564, 569 (1st Cir. 1994).

       3
     Section 278a provides: “Notwithstanding the existence in a
dealer’s contract of a clause reserving to the parties the
unilateral right to terminate the existing relationship, no
principal or grantor may directly or indirectly perform any act
detrimental to the established relationship . . .”

                                            -8-
Hence, the parameters of Caribe’s Law 75 rights, as the district

court   correctly      noted,        are     established    by    the     terms     of

Agreement. “[T]he ‘established relationship’ between dealer and

principal    is    bounded      by     the       distribution    agreement,        and

therefore    the    Act    only        protects        against   detriments         to

contractually acquired rights.”                  Id. (citation omitted).

            The district court framed Caribe’s legal argument as

follows:

            (1)   Even  if   Caribe   has   a   non-exclusive
            distributorship agreement with National, National
            cannot sell directly to Caribe's clients. (2)
            Checkpoint would have never ceased purchasing
            adhesives from Caribe had National never offered
            them directly to Checkpoint. (3) National's
            appropriation of Caribe's clientele violates
            Puerto Rico's Law 75.

Caribe Indus. Sys., Inc., 36 F. Supp. 2d at 450.                  The court went

on to state, “Since the second step of the progression is

inherently a question of fact, for purposes of resolving this

motion to dismiss it shall be assumed that had it not been for

National's    direct      selling          efforts,    Checkpoint       would     have

remained as Caribe's customer.”                  Id.   The district court then

concluded that Caribe had no cause of action for impairment

under Law 75 because the Agreement established a non-exclusive

distribution arrangement and permitted National to sell directly

to its customers.      Id. at 450-51.

                                           -9-
            We disagree that the facts set forth in the complaint

support an inference that Checkpoint would never have stopped

purchasing adhesives from Caribe had National not made direct

selling efforts.       What is plain from the pleaded facts is that

Checkpoint had made clear that it would no longer purchase

adhesives     from    Caribe      --   i.e.,    that     Checkpoint      effectively

announced its plans to end its existing customer relationship

with Caribe -- before it entered a new arrangement to purchase

products directly from National.

            According        to    the     allegations      in    the     complaint,

Checkpoint     informed        Caribe      that    it     intended       to   locally

manufacture its own hot melt adhesives in March of 1997.                         This

assertion was further supported at a meeting on March 26, 1997,

when   Checkpoint      told       Caribe    that    it    had     already     ordered

equipment to manufacture the adhesives.                     Caribe’s efforts at

that meeting to dissuade Checkpoint failed.                     Thus, it was clear

at this point that unless Checkpoint somehow could be persuaded

to reconsider its new, in-house plans, Caribe’s status as a

dealer supplying Checkpoint with National’s product was at an

end.   Caribe obviously recognized this; otherwise, there would

have   been   no     need,    in   Caribe’s       own    words,    for    Caribe   to

                                         -10-
“attempt[] to convince Checkpoint . . . to continue to buy

product from them.”4

           National did not enter into its own arrangement with

Checkpoint until May or June of 1997.        National’s arrangement

occurred some months after Checkpoint had informed Caribe that

it had already purchased manufacturing equipment, thus making it

plain that it would no longer need to buy hot melt adhesives

from Caribe.    There are no facts pleaded in the complaint to

suggest that National initiated action to steal Checkpoint’s

ongoing business away from Caribe.

           Caribe argues that we should infer that Checkpoint

would not have ended its customer relationship with Caribe had

National not “persuaded” Checkpoint to enter into a direct

relationship.   This, however, cannot be reasonably inferred from

Caribe’s    pleaded    facts.          See    Correa-Martinez      v.

Arrillaga-Belendez, 903 F.2d 49, 58 (1st Cir. 1990) (no need to

strain against plausibility in construing complaint).           Those

facts indicate that Checkpoint had already communicated that it

would no longer proceed with its relationship with Caribe.         It

     4Caribe argues that National also was involved in efforts to
convince Checkpoint not to manufacture its own adhesives and
continue purchasing National products from Caribe. It is true
that Caribe pleaded these facts in its complaint, but we fail to
see how these facts contravene a conclusion that Checkpoint had
already made clear that it would be discontinuing its existing
purchasing arrangement with Caribe.

                                -11-
is entirely conjectural that, had National stayed out of the

picture, Caribe eventually could have negotiated terms with

Checkpoint      sufficiently     attractive         for    Checkpoint   to   have

abandoned its stated plans to manufacture its own adhesives.

Thus, while we take as true that Checkpoint once had been

Caribe’s customer, we must conclude that Checkpoint effectively

ceased to be its customer after Checkpoint announced its in-

house manufacturing plans.

            In these circumstances, we see no provision in the

Agreement that prohibited National’s direct sales to Checkpoint.

The only potentially relevant provision is Article 7, which

permits    National     to   sell    to    “its    customers.”       Under   this

language, it might be argued (whether or not correctly, we need

not   decide)    that   a    company      that    was   purchasing   National’s

materials from a distributor could not be also a “customer” of

National     (viz.    because       it    was    already    the   distributor’s

customer).      Under that theory, the Agreement arguably might be

ambiguous as to whether it prevented National from dealing

directly with Checkpoint while the latter remained Caribe’s

customer.

            But here, as noted, the complaint makes it abundantly

plain that Checkpoint had already effectively ended its existing

customer relationship with Caribe.                Hence, nothing in the terms

                                         -12-
of   the        Agreement      prohibited     National      from       entering     a    new

arrangement             with   Checkpoint.         Under    these        circumstances,

National’s          actions     cannot   be       found    to    have     violated      the

Agreement so as to impair Caribe’s relationship with Checkpoint.5

See Caribbean Wholesales & Serv. Corp. v. U.S. JVC Corp., 963 F.

Supp.           1342,     1351-52    (S.D.N.Y.        1997)           (where   customer

independently             decided   to    stop      purchasing           products       from

distributor, principal did not cause detriment within meaning of

Law 75).

                 Since there has been no impairment of the terms of the

contract, there is no Law 75 liability.                         See Vulcan Tools, 23

F.3d       at    569.      Accordingly,      we    affirm       the    district     court,

although on         the narrower grounds set forth.6                  We need not reach,

       5
      The only “impairment” Caribe can conceivably assert is to
its hope that Checkpoint would still change its mind, despite
the fact that Caribe’s efforts at persuasion were theretofore
unsuccessful. Caribe’s argument boils down to saying that its
prior customer relationship with Checkpoint gave it some sort of
right, notwithstanding the Agreement’s non-exclusivity, to act
exclusively for National in seeking to recapture Checkpoint’s
business.   Under this approach, if Caribe were not able to
persuade Checkpoint to purchase National’s product through it,
then National would have no recourse but to accept the loss of
Checkpoint’s business.    We see nothing in the terms of the
Agreement that imposes such an extreme restriction on National’s
right to sell directly. Cf. Vulcan Tools, 23 F.3d at 569. We
cannot read the “its customers” language as implying such a
sweeping barrier given the language’s lack of explicitness and
the non-exclusivity provisions elsewhere in the Agreement.
       6
     Initially, Caribe made the additional argument that it was
entitled to a presumption of impairment under Section 278a-1(b)

                                          -13-
and do not now decide, the broader question addressed by the

district court, i.e. whether National could have sold goods

directly to Checkpoint at a time when Checkpoint was Caribe’s

ongoing customer.

           Finally, Caribe does not argue on appeal that the

district   court   erred   in   dismissing   its   claim   of   tortious

interference with a contractual relationship.         Accordingly, we

affirm the dismissal of that claim as well.

           Affirmed.

of Law 75 by alleging that National engaged in private meetings
with Checkpoint that resulted in a direct selling arrangement.
National pointed out that the 1988 amendments to Law 75 that
established the relevant presumption do not apply to preexisting
contracts such as the one between it and Caribe.          Caribe
concedes this point in its reply brief, and we need not deal
with it further.

                                  -14-