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CARIBBEAN WHOLESALES & SERV. CORP. v. U.S. JVC COR

May 12, 1997

CARIBBEAN WHOLESALES & SERVICE CORP., Plaintiff, against U.S. JVC CORP., Defendant. U.S. JVC CORP., Plaintiff, - against - CARIBBEAN WHOLESALES & SERVICE CORP., Defendant.


The opinion of the court was delivered by: LEISURE

 LEISURE, District Judge :

 In the above-captioned, consolidated actions, plaintiff Caribbean Wholesales and Service Corporation ("CWS") sues defendant U.S. JVC Corporation ("JVC") under Puerto Rico's Dealer's Contracts Act (commonly known as "Law 75"), P.R. Laws Ann. tit. 10, § 278 et seq. (1994), and JVC asserts breach of contract claims against CWS. CWS brought its action in the Superior Court of Puerto Rico, and the action was removed to the District Court of Puerto Rico and subsequently transferred to this Court. See Caribbean Wholesales & Serv. Corp. v. US JVC Corp., Civil No. 93-2053 (HL), op. at 2, 12 (Nov. 15, 1993). JVC brought its contract action in this Court, and the claims were consolidated with CWS's action as counterclaims. Before the Court are JVC's motion for summary judgment and CWS's cross-motion for partial summary judgment. For the reasons stated below, the motion and the cross-motion are respectively granted in part and denied in part.

 BACKGROUND

 CWS is a Puerto Rico corporation based in Bayamon, Puerto Rico and is an importer, distributor, and wholesaler of products in Puerto Rico. JVC is a New York corporation with headquarters in New Jersey, which manufactures and sells consumer electronic products in the United States and its territories. In September of 1981, CWS and JVC entered a distribution agreement (with its annual renewal agreements, collectively the "Agreement") whereby CWS became a wholesale distributor of JVC's products, including video and audio electronics. *fn1" The Agreement contained a forum selection clause designating New York as the forum for "all actions, suits or proceedings between JVC and [CWS] arising out of, in connection with or relating to this Agreement." E.g., Taffet Aff. Ex. 17 P. 16. The original Agreement by its terms had a duration of one year, from October 1, 1981 until September 30, 1982, but was renewed annually until 1993, when JVC formally terminated the distribution relationship. Each year, a schedule attached to the renewed distribution agreement stated the minimum purchase requirements ("MPRs") obligating CWS to buy certain amounts of specified JVC product types during that contract period.

 One of the JVC customers developed by CWS was a retailer known as BWAC, which started buying products through CWS in 1987, and which soon grew to be CWS's most important account. However, in October of 1989, M.L. Daniel, an employee at BWAC's then-parent company Transamerica, sent a memorandum to William Winders, BWAC's buyer, instructing him that "due to pricing," BWAC should stop buying from CWS and instead "join a buying group" to obtain JVC and Magnavox products. On January 1, 1990, Gabriel Villani became BWAC's Executive Vice President, and he, along with Daniel (to whom Villani reported), decided to stop buying JVC products through CWS and to seek a buying group that would suit BWAC's needs. *fn2" By March of 1990, CWS's sales of JVC product to BWAC had declined significantly, and in about June of 1990, BWAC informed CWS that it would begin buying through a mainland buying group called MARTA Cooperative of America, Inc. ("MARTA"). *fn3"

 BWAC obtained JVC video products, which it had previously bought from CWS, through MARTA. JVC audio products, which BWAC had also bought through CWS, *fn4" were not available through the buying group. Starting apparently in the summer of 1990, *fn5" JVC arranged to sell audio merchandise directly to BWAC. CWS contends that JVC's prices to BWAC were lower than those to CWS for the same audio merchandise. This assertion is based upon a comparative summary of prices, listing prices charged to CWS and to BWAC, as calculated from invoices. The summary applies a 2% discount for early payment and an additional 10% discount to the BWAC invoices. See Reyes Jr. Aff. Ex. 23 n.2. The term "2% 25 net 30" appears on the invoices, thus supporting the application of a 2% discount upon the assumption that invoices would be paid within 25 days. However, each invoice's net total already reflects a 10% deduction, and the Court can find no basis for CWS's calculation of an additional 10% discount. *fn6" Applying the 2% discount alone, the prices charged to BWAC are slightly higher than those charged to CWS.

 Effective October 1, 1990 the parties entered an amendment (the "Amendment") to the distribution agreements, providing for a 2% commission on all JVC sales to BWAC through MARTA until March 31, 1991, in exchange for CWS's support services to BWAC. *fn7" The Amendment was made expressly in recognition of the fact that BWAC was participating in MARTA, and was arrived at after several months of negotiations over the amount of commissions and other terms. It is undisputed that, at no time during the negotiation, was the expiration date of the Amendment an issue of contention. However, when JVC stated, in a letter to CWS dated March 21, 1991, that the Amendment was due to expire at the end of the month, CWS responded with some surprise, stating its understanding that the Amendment was intended to be renewed along with the body of the distribution agreement. Nevertheless, JVC did not make commission payments as to any sales occurring after March 31, 1991.

 During the same years, JVC began expressing concerns about CWS's payments on its account. Although not obligated to do so by the Agreement, *fn8" JVC had, since 1984, offered CWS payment terms of "3% 30 net 60" -- in other words, payment would be due within 60 days of the invoice date, but if CWS paid within 30 days, it would receive a 3% discount. In 1989 and 1990, CWS on a number of occasions failed to take advantage of the 3% discount term. Further, in May of 1990, CWS's account became past due. *fn9" JVC's concerns regarding the account were repeatedly expressed to CWS. In the summer of 1990, JVC informed CWS that it would no longer sell to CWS on open account. In October of 1990, CWS entered a "floor plan" financing arrangement with Chrysler First Credit Corporation (with its successor, collectively "Chrysler"), *fn10" whereby any order from JVC would not be shipped until Chrysler approved the order. As long as CWS was not delinquent on its payments and was not in default as to its obligations to disclose certain financial information to Chrysler, the orders would be approved. Chrysler gave CWS terms of 90 days for payment (longer than JVC offered but with no discount for early payment), and gave CWS a credit line of $ 1.5 million (an increase over the $ 650,000 credit line extended by JVC).

 JVC contends that CWS's financial condition and its ability to market JVC products effectively were adversely impacted by the creation of several companies affiliated *fn11" with CWS. It is undisputed that CWS's principals started two companies: Supreme Electronic Distributors, Inc. ("Supreme"), formed in 1986, and H & H Sales, Inc. ("H & H"), formed in 1990. These companies became distributors of consumer electronics products manufactured by JVC's competitors. In addition, CWS's principals formed H.R. & Associates ("H.R.") in 1989, which bought and developed real estate for CWS's warehouse and office facilities. The parties dispute the extent of financial dealings among the companies, but it appears to be undisputed that CWS occasionally made intercompany loans to Supreme, H & H, and H.R., and paid some employees' salaries and certain other expenses for the other companies. JVC contends that CWS's support of the affiliated companies caused financial problems for CWS that affected its ability to pay JVC in a timely manner. *fn12" CWS contends that the intercompany loans did not interfere with CWS's ability to pay JVC, *fn13" and that the relations between the companies did not affect CWS's marketing of JVC products.

 Starting apparently in about April of 1992, *fn14" CWS's account with Chrysler was delinquent on a number of payments, and, in a letter dated June 30, 1992, Chrysler informed CWS that "no approvals of inventory orders will be granted until we receive current payments totalling $ 110,740.18" along with copies of certain financial statements required to be disclosed under the "floor plan" agreement. Gentry Aff. Ex. A. CWS did not cure the delinquencies, and no JVC orders were approved thereafter.

 During about the same period, a dispute arose regarding the renewal Agreement covering the contract period from October 1, 1991 until September 30, 1992. The Agreement for that contract period was sent to CWS in September or October of 1991, and, unlike the standard printed form Agreements covering the contract periods from 1983-84 until 1990-91, was a typed contract. Although in other respects identical to the previous annual Agreements, the proposed 1991-92 contract (the "Proposed Contract") contained a general release clause providing that:

 
In consideration of the mutual promises contained herein and other valuable consideration the undersigned DISTRIBUTOR on its own behalf and on behalf of its executors, administrators, successors and assigns, hereby releases JVC, its agents, affiliates and/or subsidiaries from any and all liability of every nature whatsoever that it ever had or now may have from the beginning of the world to the date of this Agreement.

 Reyes Jr. Aff. Ex. 47 P. 11(d). The Proposed Contract arrived without an explanation of the new provision. *fn15"

 CWS did not execute the Proposed Contract at that time, *fn16" and in November of 1991, JVC noted that it had not received the renewal and sent another copy of it to CWS. By a letter dated November 27, 1991, CWS informed JVC that "due to certain problems experienced by [sic] JVC contractual relationship with BWAC, I have requested my legal counsel an opinion [sic] as to the extent and consequences of this agreement." Reyes Jr. Aff. Ex. 49. Four and a half months later, by a letter dated March 12, 1992, CWS's counsel proposed that CWS and JVC meet to discuss the Proposed Contract, "BWAC's situation and the future of the relationship between CWS and JVC." Taffet Aff. 69 at 1. Several weeks later, in a letter dated April 6, 1992, JVC's general counsel wrote to CWS that "we can not [sic] and will not ship additional merchandise unless we have a signed agreement from you." *fn17" Reyes Jr. Aff. Ex. 50.

 The parties met on April 24, 1992, and at that meeting, CWS specifically expressed its objection to the general release clause. JVC agreed to delete the paragraph, although it is not clear when this happened. *fn18" The offending paragraph was removed, and the renewal Agreement (without a general release clause) for the 1991-92 contract period was executed by CWS on June 10, 1992. Due to the lapse of the Agreement, however, JVC had withheld shipments of merchandise to CWS from April until June of 1992. *fn19" CWS alleges that, as a result of JVC's refusals to ship, CWS had to cancel a prepaid promotional campaigns and a number of dealer orders due to lack of inventory.

 In November of 1992, despite the continued delinquency of CWS's "floor plan" account and Chrysler's continued refusal to approve orders, JVC and CWS entered an Agreement renewing the distribution relationship for the period from October 1, 1992 until September 30, 1993. The MPR schedule for that contract period was maintained at the levels set in the previous year. *fn20" JVC alleges that CWS failed to meet the sales quota during this contract period.

 Finally, in March of 1993, CWS brought the instant action in Puerto Rico Superior Court, alleging violations of Law 75. Meanwhile, Chrysler had continued since June 30, 1992 to refuse to approve CWS's credit purchases of JVC products, based on the continued delinquency of CWS's account. From April to July of 1993, Chrysler and CWS attempted to arrange a work-out of the account. In settlement of the debt, CWS paid $ 12,500 in cash and on July 27, 1993, released almost all its remaining JVC inventory, valued at slightly over $ 110,000, to Chrysler. All of the merchandise was over a year old. At about the same time, JVC removed CWS's Puerto Rico lawsuit to federal court in the District of Puerto Rico, and instituted its breach of contract action in this Court by filing its complaint on July 26, 1993. JVC subsequently terminated the distribution relationship formally by sending notice, dated July 28, 1993, that the Agreement would be terminated effective August 7, 1993.

 CWS states claims under Law 75, alleging that JVC impaired the existing distribution relationship by: (1) selling products directly to BWAC; (2) failing to renew the Amendment providing for commissions on JVC's sales to BWAC through MARTA; (3) ending its practice of selling to CWS on open account; (4) suspending shipments of products, starting in April of 1992; and (5) imposing unreasonable MPRs. In addition, CWS claims that JVC violated Law 75 by formally terminating the Agreement in 1993 without just cause. JVC counterclaims that CWS breached the Agreement by: (1) failing to fulfill the MPRs set for the 1992-93 contract period; and (2) bringing the Law 75 action in Puerto Rico Superior Court in contravention of the contract term designating New York as the forum for disputes arising under the Agreement. JVC moves for summary judgment as to the Law 75 claims, and CWS cross-moves for summary judgment as to the contract claims.

 DISCUSSION

 Puerto Rico's Law 75 was enacted to protect local businesses from what were perceived as abusive and arbitrary practices by larger, primarily mainland-based corporations seeking to market their products through Puerto Rico distributorships. See R.W. Int'l Corp. v. Welch Foods, Inc., 88 F.3d 49, 51 (1st Cir. 1996) (citing Vulcan Tools of P.R. v. Makita, U.S.A., Inc., 23 F.3d 564, 568 (1st Cir. 1994)). Such a corporation, with its superior bargaining position, could in the absence of Law 75's protections terminate a local dealer's distribution contract once the dealer had created a market for the supplier's goods. The Puerto Rico legislature, believing that traditional contract law principles offered inadequate protection in the context of this imbalance of bargaining power, created Law 75 to prevent such abuses. See id.

 Law 75 "provides that, notwithstanding any contractual provision to the contrary, the supplier in a distribution contract may terminate a dealership only for 'just cause.'" Homedical, Inc. v. Sarns/3M Health Care, Inc., 875 F. Supp. 947, 949 (D.P.R. 1995). Thus, even when a dealer's contract by its express terms expires on a given date, the supplier may not "refuse to renew said contract on it normal expiration, except for just cause." P.R. Laws Ann. tit. 10, § 278a (1994). "Just cause" is statutorily defined as "nonperformance of any of the essential obligations of the dealer's contract, 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 [that is, the supplier,] in promoting the marketing or distribution" of its products. Id. § 278(d).

 One court has summarized that cases interpreting Law 75 have found "just cause" to exist in any one of the following situations:

 
(1) when a dealer used the principal's trademarks of products for unfair competition and without authority.
 
(2) when a dealer assigned its contractual rights to a competitor of the principal.
 
(3) when a dealer had limited sales, did not operate its own service organization and did not ...

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