Jose Santiago, Inc. v. Smithfield Packaged Meats Corp. ( 2023 )

United States Court of Appeals
For the First Circuit
No. 22-1491
JOSÉ SANTIAGO, INC.,
Plaintiff, Appellant,
v.
SMITHFIELD PACKAGED MEATS CORP.,
Defendant, Appellee,
SMITHFIELD FOODS, INC.,
Defendant.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF PUERTO RICO
[Hon. Silvia Carreño-Coll, U.S. District Judge]
Before
Kayatta, Howard, and Thompson,
Circuit Judges.
Alfredo Fernández-Martínez, with whom Carlos R. Baralt-Suárez
and Delgado Fernández LLC were on brief, for appellant.
Ryan David Frei, with whom Garrett Hansbrough Hooe,
McGuireWoods LLP, Henry O. Freese‐Souffront, Daniel Pérez‐Refojos,
and McConnell Valdés LLC were on brief, for appellee.
April 25, 2023
KAYATTA, Circuit Judge. Puerto Rico's Law 75 governs
the relationships between distributors in Puerto Rico and their
suppliers. José Santiago, Inc. ("JSI"), is a distributor of food-
service products in Puerto Rico. It contends that one of its
suppliers violated Law 75 by refusing to continue filling JSI's
orders unless JSI agreed to a written distribution agreement that
would limit the products it could order. JSI filed a motion for
a preliminary injunction under Law 75, which the district court
denied. Although we disagree with some of the district court's
reasoning, we uphold its ultimate conclusion that a preliminary
injunction is not warranted here. Of course, any conclusions
bearing on the merits contained in this opinion should be
understood as nothing more than "statements as to probable
outcomes." Wine & Spirits Retailers, Inc. v. Rhode Island, 481
F.3d 1, 4 (1st Cir. 2007) (quoting Cohen v. Brown Univ., 101 F.3d
155, 169 (1st Cir. 1996)). The parties will have opportunities to
present further evidence and renew arguments as the case
progresses. Re-Ace, Inc. v. Wheeled Coach Indus., Inc., 363 F.3d
51, 58 (1st Cir. 2004); Luis Rosario, Inc. v. Amana Refrigeration,
Inc., 733 F.2d 172, 173 (1st Cir. 1984).
I.
JSI is the largest food-service distributor in Puerto
Rico. It receives food-service products directly from
manufacturers and producers and delivers them to restaurants,
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hotels, and other enterprises that serve food in Puerto Rico. In
2021, JSI's estimated annual volume of business was about
$300 million.
In 1995, JSI became the exclusive distributor for
Farmland Foods, Inc. ("Farmland"), food-service products in Puerto
Rico. Farmland produced packaged meat products to be used in the
food-service industry. A letter dated October 10, 1995, from
Farmland to JSI confirmed JSI's status as exclusive distributor.
In 2003, Farmland was acquired by Smithfield Foods,
Inc., which sold similar lines of meat products under a variety of
different brands. In 2014, Farmland merged with another Smithfield
entity, with the surviving company named Smithfield Farmland,
Corp. Smithfield Farmland was then merged into Smithfield Packaged
Meats Corp. in 2017. We refer collectively to the various
Smithfield entities involved in this case as "Smithfield."
Although Farmland no longer existed as a company after
2014, for some time Smithfield continued to sell products under
the Farmland brand, alongside its other brands. And while
Smithfield and JSI had no written agreement, Smithfield recognized
JSI's status as the exclusive distributor for Farmland-branded
products until February 2021. Some of Smithfield's other brands
were distributed in Puerto Rico by Ballester Hermanos, Inc.
("Ballester"), at the same time that JSI was distributing Farmland-
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branded products.1 At least some of the products distributed by
Ballester were the same as products distributed by JSI, just under
different branding.
The method by which JSI distributed the products
remained the same throughout the years. JSI ordered products by
sending a purchase order to Smithfield. The purchase orders
identified the products JSI wanted to order, the relevant
quantities, and JSI's understanding of the prices. They also
stated that payment was due twenty-four days after Smithfield sent
JSI an invoice. And they contained an instruction that read, "If
you do not agree with prices, terms, qtys, freight and pack sizes
in this [purchase order], do not process order until buyer sends
you a new [purchase order]."
To fill a purchase order, Smithfield sent the products
to JSI's authorized agent in Florida, where JSI took title to the
products and assumed all risk. The products then traveled by ocean
freighter to Puerto Rico, where JSI picked them up in its trucks,
stored them in its facilities, and delivered them to its clients.
On occasion, Smithfield was unable to fill JSI's orders due to
shortages of inventory caused by production capacity issues.
1 The record does not reveal when Ballester began
distributing Smithfield's other brands in Puerto Rico or whether
Ballester's distribution of these brands was exclusive.
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In 2019, Smithfield embarked on what it describes as a
"global SKU rationalization process," with the goal of
consolidating and reducing the number of brands and redundant
products that it sold. Smithfield later accelerated this
consolidation due to production issues caused by the COVID-19
pandemic. In October 2019, Smithfield met with JSI to discuss its
planned consolidation. Smithfield informed JSI that JSI would
continue to be the exclusive distributor for Farmland-branded
products in Puerto Rico. JSI insists that Smithfield said that
JSI would be the exclusive distributor for any Smithfield products
resulting from the consolidation of the Farmland brand. Smithfield
maintains that it made clear that JSI would be the exclusive
distributor for Farmland products only as long as those products
were branded as such, and that it did not promise JSI exclusive
rights to the consolidated Smithfield brand.
On May 18, 2020, Smithfield sent its distributors a
letter providing notice that a number of its brands -- including
Farmland -- would be consolidated into the Smithfield brand. It
stated that "the same great products you have come to expect under
a variety of names will be consolidated into just a few." JSI
requested clarification, and at a meeting Smithfield informed JSI
that it intended for both JSI and Ballester to distribute
Smithfield-branded products. This prompted JSI, in June 2020, to
send a cease-and-desist letter to Smithfield asserting that
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selling products previously distributed by JSI to another
distributor would violate Puerto Rico's Law 75, which forbids
suppliers from impairing their relationships with their
distributors in Puerto Rico without just cause.
Smithfield responded to JSI's letter in July 2020. It
clarified its position that JSI would remain the exclusive
distributor for Farmland-branded products until the brand was
withdrawn, but that JSI would not acquire exclusive distribution
rights for Smithfield-branded products. It offered JSI a non-
exclusive distribution contract for the Smithfield brand in Puerto
Rico, noting that it made the same offer to another distributor.
JSI refused, contending that it had exclusive distribution rights.
In December 2020, Smithfield sent JSI a notice that the
exclusive distribution relationship for Farmland products would
terminate on February 1, 2021, when the Farmland products would be
consolidated into the Smithfield brand.
Between February 2021 and May 2022, Smithfield continued
to fill JSI's purchase orders. JSI ordered -- and Smithfield
filled orders for -- about forty types of products during this
time period, although the purchase orders themselves fluctuated
with respect to products and volumes. It appears from the record
that the products that JSI distributed after February 1, 2021,
were, in substance, identical or near-identical to the products it
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distributed beforehand -- the only material difference being the
branding that appeared on the packaging.
In October 2021, with JSI still refusing to agree to a
non-exclusive distribution contract for Smithfield products,
Smithfield entered into an exclusive distribution contract for
certain products in Puerto Rico with Ballester. That contract
encompassed many of the products that Smithfield continued to sell
to JSI, but it carved out seven products that Smithfield calculated
made up the bulk of JSI's purchase volume by weight.2 Despite the
exclusive contract with Ballester, Smithfield for a while
continued filling JSI's orders for all products, not just the seven
carved-out products.
In February 2022, Smithfield offered an exclusive
distribution contract to JSI for the seven carved-out products.
JSI declined because it wanted to continue distributing all forty
products, rather than limit itself to the seven carved-out
products. Smithfield continued to fill JSI's purchase orders.
In late April 2022, Smithfield began notifying JSI that
it could not fill JSI's orders because JSI had exceeded its credit
limit with Smithfield. Smithfield also sent notices to JSI that
it could not fill orders because certain of JSI's payments were
2 Smithfield calculated that in April 2022, the seven carved-
out products made up approximately sixty percent of JSI's purchase
volume by weight.
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past due.3 In a June 2022 declaration, Smithfield claimed JSI had
paid its invoices an average of 8.75 days late over the prior year,
and that those late payments played a role in Smithfield's decision
to enter an exclusive distribution agreement with Ballester. But
the first time Smithfield complained about late payments to JSI
was on May 2, 2022, more than six months after Smithfield entered
into its new agreement with Ballester. Smithfield continued
filling JSI's purchase orders once JSI corrected the credit-limit
and late-payment issues.
On May 4, 2022, Smithfield sent JSI an email renewing
its February offer to give JSI exclusive distribution rights for
the seven carved-out products and stating that if JSI did not
accept, JSI must inform Smithfield by May 31, 2022, whether it
would agree to be a non-exclusive distributor in Puerto Rico for
those products. The email made clear that, in either case, the
terms would be formalized in a written contract. It stated that
Smithfield would "temporarily" receive JSI's orders until May 31,
2022. JSI understood this to mean that Smithfield would not fill
JSI's orders after this date unless JSI agreed to a written
distribution contract for the seven carved-out products. The
deadline was later extended to June 15, 2022.
3 These were two separate issues; because JSI had twenty-
four days to complete payment, it was possible for JSI to be over
its credit limit while still being current on payment.
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JSI did not accept Smithfield's offers, instead opting
to file suit against Smithfield in the U.S. District Court for the
District of Puerto Rico. Among other allegations, JSI contends
that Smithfield violated Law 75, first by revoking JSI's status as
exclusive distributor and selling the same products to another
distributor in Puerto Rico, and then by conditioning the filling
of JSI's orders on JSI's agreement to limit those orders to the
seven carved-out products. JSI moved for a preliminary injunction
under Law 75 to preserve the status quo -- i.e., Smithfield's
filling of JSI's orders for all forty products on a non-exclusive
basis -- while the case was litigated. It contends that absent an
injunction, JSI would have to establish relationships with new
suppliers and would lose its reputation as a reliable source of
products. In 2021, JSI's annual sales of Farmland and Smithfield
products totaled about $13 million.
The district court denied JSI's motion for a preliminary
injunction. JSI timely appealed. We have jurisdiction under 28
U.S.C. § 1292(a)(1).
II.
Puerto Rico's Law 75 "'governs the business relationship
between principals and the locally appointed distributors that
market their products.' The statute was enacted to avoid 'the
inequity of arbitrary termination of distribution relationships
once the designated dealer had successfully developed a local
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market for the principal's products and/or services.'" Medina &
Medina Inc. v. Hormel Foods Corp., 840 F.3d 26, 41 (1st Cir. 2016)
(cleaned up) (quoting Irvine v. Murad Skin Rsch. Lab'ys, Inc., 194
F.3d 313, 317 (1st Cir. 1999)).
In furtherance of that goal, the statute allows courts
to grant preliminary injunctions "ordering any of the parties, or
both, to continue, in all its terms, the relation established by
the dealer's contract, and/or to abstain from performing any act
or any omission in prejudice thereof." P.R. Laws Ann. tit. 10,
§ 278b-1. In determining whether to grant such a remedy, Law 75
instructs the court to "consider the interests of all parties
concerned and the purposes of the public policy contained in this
chapter." Id. Thus, "[a] preliminary injunction under this
statutory provision 'is not tied to a showing of irreparable injury
or to probability of success in the case on the merits, but rather
to the policies of the Act in promoting the continuation of
dealership agreements and the strict adherence to the provisions
of such agreements.'" Waterproofing Sys., Inc. v. Hydro-Stop,
Inc., 440 F.3d 24, 33 (1st Cir. 2006) (quoting DeMoss v. Kelly
Servs., Inc., 493 F.2d 1012, 1015 (1st Cir. 1974)). This is the
substantive standard we apply in this diversity case. Id."While the statute does not require a finding of
likelihood of success as a prerequisite to issuance of an
injunction, the court's view of the merits would certainly affect
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its judgment of the weight of the parties' interests and of the
injunction's effect on the statutory policies." Luis Rosario, 733
F.2d at 173 (quoting Pan Am. Comput. Corp. v. Data Gen. Corp., 652
F.2d 215, 217 (1st Cir. 1981)). Indeed, it is hard to see how an
injunction would further the policies of the statute if it
prevented a principal from taking an action that the statute
allows. For that reason, we assess JSI's likelihood of success on
the merits before analyzing, in light of that assessment, the
interests of the parties and the purposes of Law 75.
The district court found JSI unlikely to succeed on the
merits and, due largely to that unlikelihood, it concluded that
the parties' interests and Law 75's public policy weighed against
issuing an injunction. We review this decision for "abuse of
discretion, with conclusions of law reviewed de novo and findings
of fact for clear error." Trafon Grp., Inc. v. Butterball, LLC,
820 F.3d 490, 493 (1st Cir. 2016).
III.
Law 75's protections extend only to "dealers." A
"dealer" is a "[p]erson actually interested in a dealer's contract
because of his having effectively in his charge in Puerto Rico the
distribution, agency, concession or representation of a given
merchandise or service." P.R. Laws Ann. tit. 10, § 278(a). In
turn, a "dealer's contract" is a "[r]elationship established
between a dealer and a principal or grantor whereby and
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irrespectively of the manner in which the parties may call,
characterize or execute such relationship, the former actually and
effectively takes charge of the distribution of a merchandise, or
of the rendering of a service, by concession or franchise, on the
market of Puerto Rico." P.R. Laws Ann. tit. 10, § 278(b). A
dealer's contract need not be in writing. Medina & Medina, 840
F.3d at 47 n.16 ("Law 75 does not require an agreement to be in
writing for its terms to have legal effect.").
Once a dealer's contract has been established, Law 75
prohibits a principal from "directly or indirectly perform[ing]
any act detrimental to the established relationship or refus[ing]
to renew said contract on its normal expiration, except for just
cause." P.R. Laws Ann. tit. 10, § 278a. The statute presumes
impairment in several circumstances, including "when the principal
or grantor unjustifiably refuses or fails to fill the order for
merchandise sent to him by the dealer in reasonable amounts and
within a reasonable time." P.R. Laws Ann. tit. 10, § 278a-1(b)(3).
Our case law has clarified that Law 75's protections do
not extend beyond the scope of the parties' contract. We have
said that "the 'established relationship' between dealer and
principal is bounded by the distribution agreement, and therefore
the Act only protects against detriments to contractually acquired
rights." Vulcan Tools of P.R. v. Makita USA, Inc., 23 F.3d 564,
569 (1st Cir. 1994). "The protection afforded distributors under
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Law 75 . . . is 'circumscribed by those rights acquired under the
agreement regulating their business relationship.' Thus, 'whether
or not an impairment has taken place will depend upon the specific
terms of the distribution contract.'" Medina & Medina, 840 F.3d
at 41 (citations omitted) (quoting Irvine, 194 F.3d at 318). Said
differently, "[t]he 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, 23 F.3d at
569.
That being said, Law 75 allows principals to impair the
established relationship only if they can show they had "just
cause" to do so. P.R. Laws Ann. tit. 10, § 278a; see R.W. Int'l
Corp. v. Welch Foods, Inc., 88 F.3d 49, 52 (1st Cir. 1996)
(Welch II) ("[O]nce a dealer demonstrates that its principal
unilaterally terminated their contract, the principal must carry
the burden of persuasion on the factual elements of the 'just
cause' showing."). "Just cause" is defined in the statute as
"[n]onperformance 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 in promoting the marketing
or distribution of the merchandise or service." P.R. Laws Ann.
tit. 10, § 278(d). Of course, just as the parties' agreement may
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circumscribe the extent of the dealer's rights, so too the
agreement, by allowing certain conduct or inaction by the dealer,
may circumscribe the ability of the principal to deem such conduct
or inaction just cause.
To summarize, to prove a violation of Law 75, a party
must show that it is a dealer (with a dealer's contract), and
that the principal refused to renew or impaired the terms of the
existing contract between the parties. Once this has been shown,
the principal may avoid liability by proving that it had just cause
for its nonrenewal or impairment of the contract.
A.
The district court found JSI to be a dealer based on the
following facts:
JSI promotes Farmland and Smithfield products,
keeps an inventory of them in its warehouses,
fixes the price at which it sells them,
delivers them to its clients, bills its
clients, extends credit to its clients, has a
Foodservice Sales Marketing Program agreement
with Smithfield where Smithfield reimburses it
a small sum for advertising costs, assumes the
risk before the products enter Puerto Rico,
purchases the products from Smithfield, and
maintains its own facilities. Needless to
say, JSI has total control over the products'
distribution in Puerto Rico.
José Santiago Inc. v. Smithfield Foods, Inc., No. 22-1239, 2022 WL
2155023, at *4 (D.P.R. June 15, 2022). Smithfield does not contest
the district court's finding that JSI is a dealer, and we therefore
assume it to be so.
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Smithfield does argue, however, that JSI did not have a
"dealer's contract." The district court assumed that a non-
exclusive distribution contract existed between the parties,
although it noted its skepticism that such a contract existed.
See id. ("JSI has not accepted any offer to form one and the
inconsistency in the parties' dealings make it more likely that
each product purchase constitutes a contract."). Smithfield
argues that JSI consistently rejected Smithfield's offers for a
non-exclusive distribution contract and the parties never accepted
master terms governing their relationship. Therefore, Smithfield
contends, "the parties effectively dealt on a purchase order-by-
purchase order basis."
Smithfield does not explain how JSI could be a dealer
without a dealer's contract, given that the statutory definition
of "dealer" requires that a dealer be "actually interested in a
dealer's contract." P.R. Laws Ann. tit. 10, § 278(a). Moreover,
the statutory criteria for being a dealer and having a dealer's
contract are essentially identical: One would be hard pressed to
come up with a scenario in which an actor has "effectively in his
charge in Puerto Rico the distribution, agency, concession or
representation of a given merchandise or service" but is not part
of a relationship in which that actor "actually and effectively
takes charge of the distribution of a merchandise, or of the
rendering of a service, by concession or franchise, on the market
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of Puerto Rico." P.R. Laws Ann. tit. 10, § 278(a)–(b). And
Smithfield does not point us to any such scenario. So the same
facts that establish JSI's status as a dealer give rise to a
relationship constituting a dealer's contract.
More fundamentally, Smithfield's argument premised on
the absence of a formal offer and acceptance fails because Law 75
recognizes a dealer's contract "irrespectively of the manner in
which the parties may call, characterize or execute such
relationship." P.R. Laws Ann. tit. 10, § 278(b). The dealership
relationship here was not established through a formal offer and
acceptance, but rather through the parties' course of dealing
described above that led to "JSI [having] total control over the
products' distribution in Puerto Rico." José Santiago, 2022 WL
2155023, at *4; see R.W. Int'l Corp. v. Welch Food, Inc., 13 F.3d
478, 482–83 (1st Cir. 1994) (Welch I) (holding that Law 75 applied
where plaintiff had been performing functions of a dealer, even
though parties had not agreed on essential terms).
Nor does JSI's refusal to sign a written non-exclusive
distribution agreement negate the relationship established by the
parties' conduct, as Smithfield argues. JSI declined Smithfield's
offer of a written non-exclusive distribution agreement because it
claimed that it was already an exclusive distributor protected by
Law 75. Indeed, in June 2020, JSI sent Smithfield a cease-and-
desist letter taking the position that selling products to another
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distributor would violate Law 75 by impairing JSI's exclusive
distribution rights. Refusing to consent to a non-exclusive
distribution arrangement because one believes one has exclusive
distribution rights can hardly be construed as renouncing any
distribution relationship whatsoever. See, e.g., Re-Ace, 363 F.3d
at 53, 58 (affirming preliminary injunction under Law 75 where a
dealer with exclusive distribution rights rejected an offer to
make the agreement non-exclusive).
In sum, we think it likely that JSI is a dealer with a
dealer's contract. We turn next to the terms of that contract.
B.
JSI contends that it had a contractual right to have
Smithfield fill its orders for the approximately forty products
that JSI had been distributing prior to May 2022. Therefore, JSI
argues, Smithfield violated the parties' contract and Law 75 by
conditioning its filling of JSI's orders on JSI's agreement to a
written contract for only the seven carved-out products.
Smithfield argues that no such contractual right
existed. It describes the parties' relationship following
Smithfield's termination of the exclusive distribution agreement
as "purchase order-by-purchase order," such that each of JSI's
purchase orders was an offer that Smithfield was free to accept,
modify, or decline.
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With no written contract, the law looks to the parties'
"course of dealing to discern the terms of the agreement." Medina
& Medina, 840 F.3d at 46 n.15. In so doing, the district court
determined that JSI did not have a contractual right to have
Smithfield fill its orders:
The problem here is that we see no pattern or
consistency in the parties' course of dealing.
There is no minimum product volume that JSI
must purchase. There is no minimum product
volume that Smithfield must sell. There are
no circumstances under which Smithfield must
fill JSI's purchase orders. Indeed,
Smithfield can refuse to fill a purchase order
if it disagrees with JSI's terms. JSI's
product needs cannot be forecasted from
Smithfield's sales-tracking software because
its purchases vary so greatly. The short of
it is that we see no contractually acquired
rights at all. For JSI is not obligated to
place orders and Smithfield is not obligated
to fill them.
José Santiago, 2022 WL 2155023, at *4. The following factual
findings provided the basis for the district court's
determination:
Neither the exclusive distribution contract
nor the nonexclusive one has set terms as to
product volume, type, or price. And the
volumes and types of products that JSI orders
have fluctuated greatly. Moreover, JSI's
purchase orders state that Smithfield should
not process an order if it disagrees with
JSI's offered price, quantity, freight, or
pack sizes. Smithfield sometimes declines to
fill JSI's purchase orders for one reason or
another. There have been times, for example,
when JSI has reached its credit limit or
Smithfield has disagreed with the terms in
JSI's purchase orders. The only consistent
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term has been "NET 24," meaning that payment
is due twenty-four days after the invoice
date. Paying on time is a part of their
relationship.
Id. at *2. Thus, the district court determined that JSI did not
have a right to have its orders filled because JSI's orders
fluctuated with respect to volumes and types of products, and the
purchase orders allowed Smithfield to decline to fill an order if
it disagreed with its terms (which Smithfield did on occasion).
The district court found that the only consistent term was that
JSI had to pay within twenty-four days of the invoice.
We review the district court's factual findings for
clear error. "A finding is clearly erroneous when although there
is evidence to support it, the reviewing court on the entire
evidence is left with the definite and firm conviction that a
mistake has been committed." García Pèrez v. Santaella, 364 F.3d
348, 350 (1st Cir. 2004) (quoting Lundquist v. Precision Valley
Aviation, Inc., 946 F.2d 8, 11 (1st Cir. 1991)); see Anderson v.
City of Bessemer City, 470 U.S. 564, 573 (1985). Although "[w]e
do not lightly reverse a district court's holding when reviewing
for clear error," United States v. Winston, 444 F.3d 115, 122 (1st
Cir. 2006), we think this case meets the standard.
JSI has a long history of placing orders with Smithfield,
and Smithfield has a long history of filling those orders. This
has occurred since 2003, when Farmland became part of the
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Smithfield corporate umbrella. As the district court found,
"[w]hen it wants to receive products, JSI sends a purchase order
to Smithfield" and, "[i]f Smithfield approves the order, it sends
the products to JSI's authorized agent in Jacksonville, Florida."
José Santiago, 2022 WL 2155023, at *2. The district court found
that this relationship "has not changed throughout the years,"
id., which is consistent with testimony from JSI's president that
this aspect of the parties' relationship has not changed. After
Smithfield purported to terminate JSI's exclusive distribution
contract for Farmland products, it continued to fill JSI's orders
in the same way it had done before, and for the same types of
products (albeit in at least some instances under different
branding). Indeed, Smithfield continued selling the same products
to JSI even after Smithfield had entered into an exclusive
distribution agreement with Ballester.
Smithfield claims to have continued filling JSI's orders
since February 2021 only "out of courtesy" and in hopes of
eventually reaching an agreement. But Smithfield points to no
evidence showing that it ever communicated to JSI that it was
filling orders out of courtesy on an order-by-order basis, rather
than as a continuation of the parties' longstanding relationship.
The parties' course of dealing is to be defined by their observable
behavior, rather than any subjective, unexpressed intent that one
of them claims to have had. See, e.g., P.R. Tel. Co. v. SprintCom,
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Inc., 662 F.3d 74, 91 (1st Cir. 2011) ("In determining 'the
intention of the contracting parties, attention must principally
be paid to their acts, contemporaneous and subsequent to the
contract.'" (emphasis added) (quoting P.R. Laws Ann. tit. 31,
§ 3472)); Nadherny v. Roseland Prop. Co., 390 F.3d 44, 51 (1st
Cir. 2004) ("The unexpressed intention of one party is not binding
on the other party to a contract."). And the evidence in the
record strongly suggests that Smithfield continued filling JSI's
orders after February 2021 in the exact same manner as it had done
before.
The district court found no pattern or consistency in
the parties' course of dealing because the products and volumes in
JSI's purchase orders have fluctuated. Smithfield submitted
evidence of this fluctuation between February 2021 and May 2022,
which it says reflects the order-by-order nature of the
relationship during this time period. We think this too narrow a
focus. The relevant pattern or consistency is Smithfield's
continued behavior of filling the purchase orders containing
products outside of the seven carved-out products. After all, as
JSI points out, it makes sense that products, volumes, and prices
would vary along with market conditions and consumer demand.
Moreover, Smithfield proffers no evidence showing that the
fluctuation in JSI's orders was new as of February 2021 and that
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JSI's orders did not always vary in this manner -- even under the
exclusive distribution agreement for Farmland products.
The district court also placed much weight on the
purchase orders' statements that Smithfield could decline to fill
an order if it disagreed with certain terms. But the language
instructing Smithfield to "not process order until buyer sends you
a new [purchase order]" did not allow Smithfield to decline to
fill an order at its pleasure. Rather, if the information in the
purchase order was inaccurate, or if Smithfield was unable to fill
the order, it directed Smithfield to hold off on processing the
order until JSI sent a new one that was accurate and fillable.
This is perfectly consistent with an expectation that Smithfield
would fill JSI's orders so long as they were accurate and
Smithfield was able to do so. Moreover, that same language
appeared in the purchase orders JSI sent to Smithfield before
February 2021. Smithfield would have a hard time convincing a
trier of fact that the same words meant two different things at
two different times.
In addition, when Smithfield occasionally did not fill
JSI's orders, it was either because Smithfield had a shortage of
inventory due to production capacity issues or because JSI had
exceeded its credit limit or was behind on payments. In the latter
scenario, Smithfield filled the orders once JSI paid. So JSI had
a reasonable expectation, based on Smithfield's outward conduct
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and the parties' course of dealing, that Smithfield would fill an
order if it was able to do so and JSI was current on payments (at
least until JSI received Smithfield's May 4, 2022, email).
Based on the foregoing, the record leaves no room for
doubt that Smithfield's filling of JSI's orders was part of the
contractual relationship between the parties. The district court
therefore clearly erred in concluding that JSI's right to have
Smithfield fill its orders was not part of the parties'
"established relationship."
C.
The district court also concluded that, even if
Smithfield were obligated to fill JSI's orders, it would have just
cause to impair the contract by refusing to fill them. It found
two independent bases for just cause: JSI's failure to make timely
payments and the parties' bona fide impasse in negotiations. We
address each basis in turn.
1.
"'[P]aying for goods on time normally is one of the
essential obligations of the dealer's contract,' the non-
fulfillment of which can constitute just cause under Law 75.
However, we have recognized an exception in those unusual cases
where 'a supplier does not care about late payments.'"
Waterproofing Sys., 440 F.3d at 29 (quoting PPM Chem. Corp. of
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P.R. v. Saskatoon Chem., Ltd., 931 F.2d 138, 139–40 (1st Cir.
1991)).
The district court concluded that timely payment was
more likely than not an essential term of the parties' contract,
despite Smithfield's history of tolerating late payments:
Smithfield has a history of tolerating late
payments, but it recently refused to fill
orders until JSI made payments on its overdue
invoices. Though there appears to be a
genuine factual issue about whether timely
payment was an "essential" obligation of their
contract, we think it more likely that it is
because Smithfield, without objection from
JSI, has at times refused to fill JSI's orders
until it paid overdue invoices. So Smithfield
does care about timely payment. Moreover, JSI
said that paying on time is part of their
relationship.
José Santiago, 2022 WL 2155023, at *5.
JSI argues that Smithfield's complaints about late
payments were a mere pretext for its impairment of the distribution
relationship. See Waterproofing Sys., 440 F.3d at 29–30 (affirming
grant of preliminary injunction where lower court found that the
"claim of just cause on the basis of late payments was merely
a pretext," despite disagreeing with the lower court's conclusion
that the defendant did not care about late payments).
Smithfield claimed in a declaration in June 2022 that
JSI had paid its invoices an average of 8.75 days late over the
prior year. And Smithfield's senior management evidently knew
about JSI's late payments at least as of October 2021, because its
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vice president of distributive sales declared that JSI's late
payments played a role in Smithfield's decision to enter an
exclusive distribution agreement with Ballester. But despite
being aware of JSI's late payments, Smithfield never said anything
about late payments to JSI until two days before sending the email
that JSI contends impaired its rights. And once Smithfield
received payment, it resumed filling JSI's purchase orders.
In addition, Smithfield has made abundantly clear during
this litigation -- both before the district court and on
appeal -- that it would prefer to continue its relationship with
JSI, albeit only with respect to the seven carved-out products.
There is at least some tension between Smithfield's desire to
continue doing business with JSI and its suggestion that JSI's
late payments were a "critical issue" that led to Smithfield's
decision to limit JSI's orders to seven items making up
approximately sixty percent of Smithfield's sales volume to JSI by
weight.
JSI's contention that its late payments did not justify
impairing the contract thus has considerable force. Whether it
has enough force to render the district court's finding to the
contrary clear error is a close call. Ultimately, though, it is
not a call we need make. Rather, as we will next explain, we can
affirm based on the district court's second rationale for finding
just cause: a bona fide impasse in negotiations over exclusivity.
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2.
The district court found additional just cause for
impairment due to the parties' dispute over exclusivity. Although
JSI's present motion for a preliminary injunction seeks only to
enforce a non-exclusive distribution agreement, at the time the
parties were negotiating JSI demanded exclusivity after
Smithfield's brand consolidation. And our holding above that JSI
continued to be a dealer with a contractual right to have
Smithfield fill its purchase orders has no bearing on whether JSI's
distribution rights were exclusive after the brand consolidation.
For reasons we now explain, we agree with the district court that
the parties' dispute over exclusivity constituted just cause for
Smithfield to impair the distribution relationship.
A strict read of the statutory definition of "just cause"
reveals just two types of actions, both on the part of the dealer,
that give rise to just cause: "[n]onperformance of any of the
essential obligations," and actions that "adversely and
substantially affect[] the interests of the principal." P.R. Laws
Ann. tit. 10, § 278(d). But "[a]lthough Law 75, by its plain
terms, makes the 'just cause' inquiry turn solely on
the dealer's actions or omissions, the Puerto Rico Supreme Court
has read a 'third' 'just cause' into the statute to avoid
constitutional invalidation, by holding that a principal's own
circumstances may permit its unilateral termination of an ongoing
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dealership, irrespective of the dealer's conduct." Welch II, 88
F.3d at 52 (citation omitted) (citing Medina & Medina v. Country
Pride Foods, Ltd., 858 F.2d 817, 822–23 (1st Cir. 1988)); see
V. Suarez & Co. v. Dow Brands, Inc., 337 F.3d 1, 4 (1st Cir. 2003)
("[A] plain reading of Act 75 would produce, in some situations,
absurd and constitutionally suspect results. As a consequence,
the courts have filled in other readings.").
The foundational case in this area is Medina & Medina v.
Country Pride Foods, Ltd.,4 in which the Supreme Court of Puerto
Rico analyzed a distribution contract of indefinite term with
product prices left open to negotiation. 858 F.2d at 818(reproducing in full the official translation of the court's
decision). The parties periodically set prices by mutual
agreement, and prices fluctuated with changes in the Georgia
market, a recognized industry guideline. Id. At one point when
the principal demanded higher prices, the parties negotiated in
good faith but failed to reach an agreement. Id. at 818–19. The
principal then withdrew from the Puerto Rico market, and the dealer
sued for terminating the distribution relationship without just
cause. Id. at 819.
4 This Medina & Medina case, from 1988, is distinct from the
2016 Medina & Medina case cited earlier in this opinion. We will
refer to it as "Medina & Medina (1988)."
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In response to a certified question from this court, the
Supreme Court of Puerto Rico considered whether a principal's
withdrawal from the Puerto Rico market in light of a bona fide
impasse in negotiations with its dealer could constitute "just
cause" under Law 75. Id. The court observed that it "would raise
serious constitutional objections" if Law 75 "turn[ed] dealerships
into interminable relationships," such that principals "would be
subjected to live in perpetual symbiosis with the distributors
under all types of circumstances." Id. at 822–23. Acknowledging
that "the lawmaker's foresight is not always absolute" and that
"on occasions this Court has had to put some contents into the
statute," the court looked to the purposes of Law 75 to overcome
this potential constitutional hurdle. Id. at 821–23. It observed
that "[t]he principal-dealer relationship is one of collaboration
in the distribution and sale of a product" and that the parties
"are not connected by any dependency agreement or relationship
subordinating one enterprise to the other." Id. at 822. In light
of that relationship, the court stated:
We cannot possibly construe the statute in
such a way that the dealer would govern -- by
imposing his conditions -- the principal's
sales policies, or vice[ ]versa, with the
inevitable loss of the financial and legal
autonomy of both. Such interpretation would
be contrary to public order because it would
place an unreasonable restriction on man's
free will.
Id. at 823. Accordingly, the court held that Law 75
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does not bar the principal from totally
withdrawing from the Puerto Rican market when
his action is not aimed at reaping the good
will or clientele established by the dealer,
and when such withdrawal -- which constitutes
just cause for terminating the
relationship -- is due to the fact that the
parties have bargained in good faith but have
not been able to reach an agreement as to
price, credit, or some other essential element
of the dealership.
Id. at 824. The court went on to state that such a termination
"must be preceded by a previous notice term which shall depend on
the nature of the franchise, the characteristics of the dealer,
and the nature of the pre-termination negotiations." Id.Subsequent decisions of the Supreme Court of Puerto Rico
and this court have clarified and expanded the holding of Medina
& Medina (1988) to continue making just cause under Law 75 a
workable concept. In Borg Warner International Corp. v. Quasar
Co., 138 D.P.R. 60 (P.R. 1995), the Supreme Court of Puerto Rico
clarified that proposed changes in contractual terms motivated by
the principal's business circumstances may lead to an impasse
constituting just cause, where such proposed changes are
reasonable and made in good faith. There, a drop in the sale of
products led to a corporate reorganization by the principal's
parent company. Borg Warner, Official Translation at 2–3. As a
result, the dealer's source of products shifted from the original
principal to an affiliated company, and this shift came with
various changes to the terms of distribution. Id. at 3, 14. The
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dealer objected and, after negotiations between the dealer and the
affiliate broke down, the principal withdrew from the Puerto Rico
market. Id. at 7. The court held that the principal had just
cause to terminate the relationship because the proposed changes
in corporate structure and the terms of distribution were
reasonable and made in good faith. Id. at 10–17, 24. In so
holding, the court emphasized that the purpose of Law 75 requires
that a supplier have "the necessary leeway . . . to organize and
reorganize his distribution chain efficiently and economically."
Id. at 24. Law 75, the court stated, "cannot serve as a
straitjacket, restricting . . . every move the principal makes
without taking into consideration justifiable situations." Id.We later held that a principal's business circumstances
may justify termination even where no negotiation between the
parties has occurred. In V. Suarez, the principal terminated the
distribution relationship because it sold the product lines being
distributed to another company, which did not agree to assume the
distribution agreement. 337 F.3d at 3. Due to confidentiality
obligations, the principal did not inform the dealer of this sale
until it had already occurred, so there was no opportunity for
negotiation (nor were there any terms to negotiate). Id. We held
that the principal's termination of the product line constituted
just cause for terminating the relationship. Id. at 9. We
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rejected the dealer's argument that good-faith negotiation was a
prerequisite for just cause under these circumstances, stating:
Here, either negotiation would be meaningless
or the plaintiff dealer would acquire leverage
it would not otherwise possess. This latter
effect would create a new imbalance of power,
making the entirely legitimate and unrelated
corporate interests of the principal in
divesting itself of a product line subject to
the interests of dealers. To read the Act to
require such a result could discourage
national and multinational companies from
entering into distributorship agreements
subject to Act 75 in Puerto Rico.
Id. at 8. Requiring the principal to negotiate with the dealer
before engaging in its legitimate and unrelated business decision,
we reasoned, "would be directly contrary to two stated purposes of
the statute: encouraging a level playing field and not creating
new power in the dealer." Id. at 7.
The notice requirement from Medina & Medina (1988) has
also been limited. See V. Suarez, 337 F.3d at 9 (no notice
required where "there was little reliance by [the dealer] on this
line of business, and there was little [the dealer] could have
done to prepare for this termination had it received advance
notice"); Borg Warner, Official Translation at 18–19 (no notice
required where dealer was the one who refused to purchase products
and practically forced the principal to withdraw from the market).
Finally, we have held that the principal need not leave
the Puerto Rico market, and can instead engage a new dealer, as
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long as the principal's action "is not aimed at reaping the good
will or clientele established by the dealer." Welch I, 13 F.3d at484 n.4 (quoting Medina & Medina (1988), 858 F.2d at 824); see
Welch II, 88 F.3d at 53–54.
These cases collectively suggest a flexible approach to
just cause under Law 75.5 See, e.g., Welch I, 13 F.3d at 484("Law 75 simply requires a supplier to justify its decision to
terminate a dealership."). This approach fits with the purposes
of Law 75 identified in the case law, i.e., leveling the playing
5 The approach to Law 75's "just cause" provision in Medina
& Medina (1988) and the line of cases just described is in stark
contrast to the Supreme Court of Puerto Rico's earlier approach in
Warner Lambert Co. (Am. Chicle Co. Div.) v. Superior Ct. of P.R.,
1 P.R. Offic. Trans. 527 (1973), where the court stated:
It should be noted that the just cause is
limited to acts imputable to the dealer. Only
when the dealer fails to comply with any of
the essential conditions or adversely affects
in a substantial manner the interest of the
principal, may the latter terminate the
contract without payment for damages. The Act
does not admit the good faith of the principal
in the termination of the contract, nor his
right to establish his own distribution system
or to make adjustments in the system which in
good faith he considers necessary to improve
his market.
Id. at 556. We adhere to the more recent approach in Medina &
Medina (1988) and subsequent decisions from the Supreme Court of
Puerto Rico and this court. See Salvador Antonetti Zequeira, A
Different Opinion About "Just Cause", 58 Rev. Jur. U. P.R. 625,
628-29 (1989) (describing the court's shift from the "literal
reading" of Warner Lambert to the "more flexible approach" in later
cases).
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field between suppliers and dealers and ensuring that suppliers do
not arbitrarily impair existing distribution relationships, while
at the same time avoiding the subordination of one enterprise to
the other and the creation of new power in dealers over suppliers'
legitimate business decisions. See Medina & Medina (1988), 858
F.2d at 820–23; Borg Warner, Official Translation at 24; V. Suarez,
337 F.3d at 7–8.
With this in mind, we turn to the matter at hand in this
case. The district court found that Smithfield had just cause to
impair the parties' distribution contract because JSI's refusal to
accept a written, non-exclusive distribution contract constituted
a bona fide impasse in negotiations. José Santiago, 2022 WL
2155023, at *5. It found that "[t]he parties' core dispute
concerns brand exclusivity." Id. And it found "no evidence that
Smithfield's decisions to consolidate its brands, do away with
Farmland, and offer JSI a written, nonexclusive distribution
contract [were] unreasonable or in bad faith." Id.JSI contends this was error for two reasons. First, JSI
argues that its refusal to accept a written contract with terms
more detrimental than its existing distribution
relationship -- i.e., seven products instead of forty -- cannot
possibly constitute just cause for impairing that relationship.
Second, JSI argues that Smithfield's actions were aimed at reaping
the goodwill and clientele established by JSI because Smithfield
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essentially handed to Ballester all of JSI's work promoting
Farmland and then Smithfield products in Puerto Rico.
JSI's first objection takes too narrow a focus. The
core impasse that the district court found constituted just cause
was not JSI's refusal to accept seven products instead of forty,
but rather the parties' unresolved dispute over exclusivity after
Smithfield's brand consolidation. That dispute arose because
Smithfield embarked on a national consolidation of brands to
eliminate redundancies in its product lines, which meant that the
Farmland brand that JSI had been distributing exclusively would be
merged with other brands distributed by other distributors
(including Ballester in Puerto Rico). The resulting consolidated
brands would then be distributed by both JSI and Ballester. JSI
claimed this was a breach of its exclusivity rights and a violation
of Law 75 and refused to sign a written, non-exclusive distribution
agreement. After trying and failing for months to get JSI to agree
to a written, non-exclusive contract, Smithfield inked an
exclusive deal with Ballester, carving out for the benefit of JSI
seven products that made up a substantial portion of JSI's order
volume by weight. This exclusive relationship with Ballester is
the apparent reason for Smithfield's decision to limit JSI to the
seven carved-out products.
We find no error in the district court's findings that
Smithfield acted reasonably and in good faith, especially given
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the presumption of good faith that exists in Puerto Rico law. See
Welch II, 88 F.3d at 53; Borg Warner, Official Translation at
10 n.8. Smithfield's business decision to increase efficiency by
consolidating its brands was reasonable in light of its product
redundancy, particularly considering the production issues that
Smithfield faced during the pandemic. This business decision was
national in scope -- not limited to Puerto Rico -- and was not
developed with JSI in mind. See V. Suarez, 337 F.3d at 8 n.11
(giving a dealer power over a principal's legitimate business
decisions "is even harder to justify where the plaintiff dealer
plays a rather minimal role in the principal's overall distributor
network"). Smithfield then found itself with two dealers in Puerto
Rico distributing separate brands that would be merged in the
consolidation. Smithfield could not grant either dealer exclusive
rights to the consolidated brand without significantly impairing
its agreement with the other. It was therefore reasonable in this
situation to offer each dealer non-exclusive rights to the
consolidated brand, such that each dealer could continue
distributing the same or similar products bearing the consolidated
brand label. The district court found that Smithfield made this
offer in good faith, and JSI points to no evidence that persuades
us otherwise.6
6 JSI does not contend that Smithfield failed to timely
notify JSI of its brand consolidation and the resulting termination
- 35 -
JSI's refusal to agree to a non-exclusive relationship
and insistence on exclusivity necessarily meant that Smithfield
was not going to end up with multiple distributors for its full
product line, as it had initially hoped. Facing this situation,
Smithfield decided to essentially divide its product line between
its two distributors on an exclusive basis: It granted exclusive
rights to Ballester for the majority of the products, while
reserving for JSI seven products making up a substantial amount of
JSI's purchase volume by weight. Nothing in the record suggests
that this was anything less than a rational way for Smithfield to
resolve the dilemma caused by JSI's resistance to a non-exclusive
contract. And we spot no error with the district court's finding
that, after JSI continually rejected Smithfield's good-faith
attempts at compromise, Smithfield had just cause to impair the
relationship due to a bona fide impasse in negotiations.
To hold otherwise would be to render perfectly legal
corporate and brand consolidations unduly problematic. Here, for
example, two distributors apparently each enjoyed distributing
similar products under different brands (and at least JSI did so
exclusively). Following the brand consolidation, something had to
give: Both distributors could not have conflicting rights over
of JSI's exclusive rights to the Farmland brand. And here
Smithfield notified JSI of its upcoming consolidation well before
it occurred, and kept JSI up to date throughout the process.
- 36 -
the same products. So unless we are to read Law 75 as precluding
good-faith brand consolidations, we must conclude that the law
allowed Smithfield to attempt to reallocate distribution rights in
a manner that acknowledged the interests of both its distributors
and its own legitimate interest in making its products available
in Puerto Rico. Cf. Borg Warner, Official Translation at 23–24.
Nor does JSI persuade us that Smithfield's conduct was
aimed at reaping the goodwill and clientele established by JSI.
JSI argues that it created a successful market for Farmland-branded
products, and then solidified the market for the rebranded
Smithfield products after the consolidation. JSI contends that
Smithfield sought to take advantage of this work while cutting JSI
out of the picture by partnering exclusively with Ballester.
JSI has failed to present evidence sufficient to
establish Smithfield's intent to co-opt JSI's efforts to develop
goodwill and clientele. See, e.g., V. Suarez, 337 F.3d at 6–7
("The district court correctly found that Suarez had not presented
evidence that Dow was attempting to take advantage of or profited
from the good will and clientele Suarez had developed.
Importantly, Suarez does not allege that Dow at any time acted in
bad faith."). As described above, Smithfield granted Ballester
exclusivity only after trying for months to continue its
relationship with JSI on a non-exclusive basis. And even after
signing the exclusive deal with Ballester, Smithfield continued
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its efforts to work with JSI by offering JSI exclusive rights to
seven carved-out products that constituted a substantial amount of
JSI's orders by weight. Moreover, it appears from the record that
Ballester also played a significant role in developing the market
for the packaged meat products in Puerto Rico, both before the
brand consolidation (for non-Farmland brands under the Smithfield
umbrella) and after (for the consolidated Smithfield brand). So
if Smithfield had acceded to JSI's demand for exclusivity, and
JSI's interpretation of Law 75 were accurate, Smithfield could
well have faced this same lawsuit, only with Ballester as
plaintiff.
In sum, the district court correctly concluded that
Smithfield would likely succeed in showing just cause to impair
its distribution relationship with JSI based on the parties' bona
fide impasse in negotiations as to exclusivity. The district court
therefore did not abuse its discretion in finding that JSI has a
low likelihood of success on the merits.
IV.
As stated above, the plaintiff's likelihood of success
on the merits in a Law 75 action bears heavily on the weight of
the parties' interests and whether an injunction would serve the
purposes of Law 75. Luis Rosario, 733 F.2d at 173. The district
court concluded that the interests of the parties and the purposes
of Law 75 weighed against entering an injunction in this case
- 38 -
because the merits strongly favored Smithfield. José Santiago,
2022 WL 2155023, at *6. It also observed that, although JSI would
likely suffer hits to its sales numbers and reputation if
Smithfield stopped filling orders, Smithfield's products
represented only a small percentage of JSI's total sales. Id.Given our analysis of the merits, we find no legal error
or abuse of discretion sufficient to justify overruling the
district court's balancing of the relevant factors. As we just
described, Smithfield has a strong interest in being free to carry
out its legitimate business decision of consolidating its brands
nationwide. And the purposes of Law 75, as interpreted by the
Supreme Court of Puerto Rico and this court, do not condone JSI's
efforts to obstruct this legitimate business decision by rejecting
Smithfield's reasonable, good-faith attempts at negotiation. See
Medina & Medina (1988), 858 F.2d at 822–23; Borg Warner, Official
Translation at 23–24; Welch II, 88 F.3d at 52; V. Suarez, 337 F.3d
at 7–8.
V.
For the foregoing reasons, we affirm the district
court's denial of JSI's motion for a preliminary injunction.
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