R.W. International v. Welch Foods, Inc.

• Court: Court of Appeals for the First Circuit
• Decided: July 10, 1996
• Docket: 95-2177
• Status: Published

Opinion

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