Trafon Group, Inc. v. Butterball LLC

United States Court of Appeals
For the First Circuit
Nos. 15-1419
15-1577
TRAFON GROUP, INC.,
Plaintiff, Appellant,
v.
BUTTERBALL, LLC,
Defendant, Appellee.
APPEALS FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF PUERTO RICO
[Hon. Jay A. García-Gregory, U.S. District Judge]
Before
Howard, Chief Judge,
Torruella and Lipez, Circuit Judges.
Jorge I. Peirats, with whom Jason R. Aguiló-Suro and
Pietrantoni Méndez & Álvarez LLC, were on brief, for appellant.
Luis A. Oliver, with whom Salvador Antonetti-Zequeira and
Fiddler González & Rodríguez, P.S.C., were on brief, for appellee.
May 2, 2016
TORRUELLA, Circuit Judge. Filing suit in the United
States District Court for the District of Puerto Rico, Plaintiff-
Appellant Trafon Group, Inc. ("Trafon") alleges that Defendant-
Appellee Butterball, LLC ("Butterball") breached an exclusive
distribution agreement in violation of Puerto Rico's Law 75 of
June 24, 1964, P.R. Laws Ann. tit. 10, § 278 et seq. ("Law 75").
Trafon sought a preliminary injunction, asking that the district
court enjoin Butterball from further impairing Trafon's exclusive
distribution rights. The district court denied the motion on the
basis that Trafon's claim was barred under Law 75's three-year
statute of limitations and subsequently dismissed the case under
Federal Rule of Civil Procedure 56(f). Trafon now appeals the
denial of the preliminary injunction and the judgment against it.
I.
A Puerto Rico-based wholesale food distributor, Trafon
alleges that, in June 2009, it acquired certain assets from Packers
Provisions Company of Puerto Rico, including an exclusive
distribution agreement with Butterball for whole bird and turkey
part products in Puerto Rico.1 Soon after the deal was executed,
Trafon learned that Butterball was selling its products to a
1 Neither the original Asset Purchase Agreement nor the attached
documents reference an exclusive distribution agreement between
Butterball and Packers Provisions Company.
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Florida wholesaler that was distributing those products to a
retailer in Puerto Rico. On October 14, 2009, Trafon's counsel
wrote to Butterball expressing concerns that Butterball was
violating the exclusive distribution agreement. On October 26,
2009, Butterball's counsel sent a letter (the "2009 letter")
denying Trafon's allegation:
[T]he allegation of a Law 75 violation rests on the
incorrect premise that your clients acquired
exclusive rights to distribute Butterball products
in Puerto Rico. For many years, Butterball (and its
predecessors) have offered Butterball branded
products for sale and distribution within Puerto
Rico without entering into a written agreement or
appointing an exclusive distributor. . . . [W]e
have not located any documents corroborating your
clients' conclusory allegation that Butterball or
any predecessors (i.e., the principals) granted any
exclusive distribution rights in Puerto Rico
limiting the principals' right to sell directly or
appoint competing distributors. If your clients
have any evidence to the contrary on this issue, we
would appreciate it if you would produce the same to
us immediately. . . . Butterball has an interest to
negotiate in good faith the terms of a formal written
non-exclusive agreement with your clients for the
sale and distribution of its products in Puerto
Rico. During this time, Butterball is agreeable to
continue to do business with your clients on the same
non-exclusive terms and on a purchase order basis as
has existed over the past few months.
The record does not reveal whether Trafon or its counsel responded
to the 2009 letter. Trafon and Butterball continued to do business
together, and each invoice that Trafon received from Butterball
contained the following notice:
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As confirmed by way of letter dated October 26, 2009,
any and all purchase orders for Butterball branded
products fulfilled by Butterball LLC are done so on
a non-exclusive basis. Nothing contained in this
invoice, nor any act or omission to act by Butterball
LLC, is intended to grant you with any exclusive
distribution rights in Puerto Rico or elsewhere.
Trafon alleges that, notwithstanding the 2009 letter and
subsequent invoices, Butterball treated Trafon as an exclusive
distributor. On various occasions where Butterball made direct
sales to Puerto Rico supermarkets in contravention of Trafon's
alleged exclusive rights, Butterball paid Trafon commissions. For
example, in 2010, Trafon consented to direct sales that Butterball
made to the supermarket chain Selectos and received a commission
of two cents per pound on the sale. 2 Similarly, on multiple
instances Trafon suspected Butterball was working directly with
supermarkets in Puerto Rico or negotiating with different Puerto
Rico-based distributors. Rather than deny that Trafon was their
exclusive distributor, Butterball responded to Trafon's queries by
promising to investigate the situations. For example, after
Trafon saw that the retailer Pueblo was selling Butterball
products, it informed Butterball that Trafon had not sold to Pueblo
and asserted that this sale was "another violation on Butterball's
2 Butterball contests this account and attests that it
consistently sold its products directly to supermarkets and mass
retailers in Puerto Rico without paying Trafon.
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end." Butterball replied that it would "investigat[e] where this
fresh turkey sale came from and report back to you."
This relationship lasted until Trafon learned that
Butterball made direct sales to various retailers in Puerto Rico
without Trafon's knowledge in 2012. Around this time, Butterball
also refused to pay commissions that it allegedly promised Trafon
for direct sales to Costco in 2011 and 2012. Trafon informed
Butterball that these actions violated the exclusive distribution
agreement. In April 2013, Butterball responded to these
allegations with a flat denial that Trafon and Butterball had ever
entered into an exclusivity agreement:
You are, of course, aware that Butterball has never
recognized Trafon as an exclusive distributor of
Butterball products. . . . [A]s things currently
stand, Butterball intends to sell to other customers
in Puerto Rico on a non-exclusive basis, and Trafon
is welcome to purchase products from Butterball on
the same basis if it chooses to do so.
Spurred by Butterball's proclamation that it intended to
work with other distributors in Puerto Rico, Trafon brought this
action in the District of Puerto Rico in September 2013 and moved
for a preliminary injunction enjoining Butterball from violating
the alleged exclusive distribution agreement. Following a
hearing, a magistrate judge issued a Report and Recommendation
("R&R") recommending that the motion for a preliminary injunction
be denied. The magistrate judge determined that Law 75's three-
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year limitations period started when Trafon received the 2009
letter, and, as a result, Trafon's claims were time-barred. The
magistrate judge also found that, even assuming Trafon's claims
were timely, Trafon had failed to show that it had ever entered
into an exclusive contract with Butterball. Adopting the R&R's
conclusion that Trafon's claims were time-barred, the district
court denied the request for a preliminary injunction. It
declined to reach the question of whether the parties had an
exclusive distribution relationship.
The district court also entered an order for Trafon to
show cause as to why the case should not be dismissed under Federal
Rule of Civil Procedure 56(f) (a court may consider summary
judgment sua sponte "[a]fter giving notice and a reasonable time
to respond"). In response, Trafon sought reconsideration of the
order denying the preliminary injunction. The district court
denied the motion and entered judgment for Butterball. Trafon now
appeals the denial of the preliminary injunction and subsequent
dismissal of its case.
II.
A.
The district court's grant or denial of a preliminary
injunction is reviewed for an abuse of discretion, with conclusions
of law reviewed de novo and findings of fact for clear error.
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Bl(a)ck Tea Soc'y v. City of Bos., 378 F.3d 8, 11 (1st Cir. 2004).
The parties do not contest the basic facts, and neither party
disputes that the determination of whether Trafon's claim is time-
barred is subject to de novo review. See Montalvo v. González-
Amparo, 587 F.3d 43, 46 (1st Cir. 2009); Skwira v. United States,
344 F.3d 64, 72 (1st Cir. 2003).
B.
Law 75 provides that, in a dealer's contract, 3 "no
principal or grantor may directly or indirectly perform any act
detrimental to the established relationship or refuse to renew
said contract on its normal expiration, except for just cause."
P.R. Laws Ann. tit. 10, § 278a; see also Irvine v. Murad Skin
Research Labs., Inc., 194 F.3d 313, 317 (1st Cir. 1999) ("Law 75
limited the principal's ability to end the relationship
unilaterally except for 'just cause' . . . . " (quoting P.R. Laws
Ann. tit. 10, § 278a)). In this way, Law 75 serves "to avoid the
3 Under Law 75, a "dealer's contract" is defined as a
[r]elationship established between a dealer and a
principal or grantor whereby and 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).
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inequity of arbitrary termination of distribution agreements once
the designated dealer ha[s] successfully developed a local market
for the principal's products and/or services." Irvine, 194 F.3d
at 317; see also R.W. Int'l Corp. v. Welch Food, Inc., 13 F.3d
478, 482 (1st Cir. 1994).
Law 75 contains a three-year statute of limitations,
providing that "[e]very action . . . shall prescribe in three
years reckoning from the date of the definite termination of the
dealer's contract, or of the performing of the detrimental acts,
as the case may be." P.R. Laws Ann. tit. 10, § 278d. The
magistrate judge found, and the district court agreed, that
Butterball's 2009 letter notifying Trafon that they did not have
an exclusive relationship constituted a "detrimental act" under
Law 75 and, therefore, that the statute of limitations had expired
long before Trafon brought suit in 2013.
The parties contest whether the 2009 letter is a
detrimental act under Basic Controlex Corp., Inc. v. Klockner
Moeller Corp., 202 F.3d 450 (1st Cir. 2000), which also involves
the alleged breach of an exclusive distribution agreement. There,
"KMC [the principal] informed Basic Controlex [the distributor]
that it intended to sell its products through other distributors
in Puerto Rico, 'effective immediately.'" Id. at 452. Although
the parties disputed whether KMC acted on these plans, this court
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determined that Basic Controlex's Law 75 action, brought over three
years after it received this notice from KMC, was time-barred
because "Basic Controlex had notice of its claim as soon as KMC
announced its plan to use other distributors in 1993. That
announcement constituted the 'performing of a detrimental act'
under Act 75, sufficient to trigger the statute." Id. at 453
(internal formatting omitted).
Similarly, the 2009 letter put Trafon on notice that
Butterball did not view their relationship as exclusive. Trafon
argues that the 2009 letter was insufficient to start Law 75's
statute of limitations as it did not mention an "affirmative act."
According to Trafon, KMC's letter in Basic Controlex announced
concrete plans to begin working with other distributors, whereas
the 2009 letter was simply a statement of legal position. Trafon's
argument, however, overlooks a significant component of Basic
Controlex: there, the First Circuit found summary judgment
appropriate on statute of limitations grounds although the parties
disputed whether KMC had followed through on its plans. Id. at
452. In other words, KMC's letter constituted a detrimental act
regardless of whether KMC actually contracted with other
distributors: what mattered was that KMC had announced its intent
to do so. Likewise, the 2009 letter announced Butterball's intent
not to treat Trafon as its exclusive distributor. Once Trafon
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received the letter, it was on notice that Butterball could begin
working with other distributors at any point in contravention of
the alleged agreement. See id. at 453 ("On May 3, 1993, KMC
expressly informed Basic Controlex of its intent to use other
distributors in alleged violation of the parties' agreement.").
As in Basic Controlex, Butterball's subsequent actions have no
bearing on whether the 2009 letter was a detrimental act under the
statute.
Trafon argues that this interpretation of Law 75 will
benefit principals at the expense of distributors. As Trafon sees
it, principals could announce to distributors that they do not
intend to honor rights conferred by Law 75 and wait three years to
act on those intentions, thereby forcing distributors to bring
lawsuits without having suffered injury. In this way,
distributors would be forced to bring costly lawsuits with no
prospect of damages or else risk forfeiting their rights under Law
75. To be sure, "evidence of the damages sustained is an essential
requirement" for an award under Law 75. Marina Indus., Inc. v.
Brown Boveri Corp., 114 D.P.R. 64, 90 (1983) (official
translation); see also Sun Blinds, Inc. v. S.A. Recasens, 111 F.
App'x 617, 619 (1st Cir. 2004) ("If a plaintiff proves termination
or impairment of the business relationship by the defendant, Law
75 provides a formula for indemnification but only 'to the extent
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of the damages caused.'" (quoting P.R. Laws Ann. tit. 10, § 278b)).
Nevertheless, lawsuits are costly for plaintiffs and defendants
alike, and we are not convinced that today's result will lead to
companies merrily announcing their intent to breach contracts and
thus inviting litigation under Law 75.
More importantly, the 2009 letter was a response to
Trafon's accusations that Butterball had worked with another
distributor, Quirch Foods. Had Trafon brought a timely suit under
Law 75, it could have identified damages stemming from that
transaction and sought provisional injunctive relief under Law 75,
just as it did here. See P.R. Laws Ann. tit. 10, § 278b-1.4 By
their very nature, limitations periods punish plaintiffs who sit
on their rights once they have the requisite knowledge to assert
a claim: Trafon could not simply wait to file until Butterball
committed a more costly breach. Cf. Jardín de las Catalinas Ltd.
P'ship v. Joyner, 766 F.3d 127, 134 (1st Cir. 2014) ("Once a
plaintiff has knowledge of the facts needed to bring a claim, it
cannot wait idly for process to be afforded or for the defendant
to change its mind.").
4 While the record does not indicate how this issue was resolved
after Trafon received the 2009 letter, during oral argument Trafon
indicated that it did not bring suit at the time because Butterball
denied having made these sales. Nevertheless, this denial did not
prevent Trafon from filing a breach of contract claim based on its
allegations.
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Trafon contends that, even if the 2009 letter
constituted a detrimental act under Law 75, Butterball's statute
of limitations defense should be barred on equitable estoppel
grounds. In the alternative, Trafon argues that a de facto
exclusive relationship developed following its receipt of the 2009
letter. Butterball contends that these issues are waived as they
were not raised before the magistrate. Although Trafon asserts
that these issues were addressed in its objection to the R&R, "an
unsuccessful party is not entitled as of right to de novo review
by the judge of an argument never seasonably raised before the
magistrate." Paterson-Leitch Co., Inc. v. Mass. Mun. Wholesale
Elec. Co., 840 F.2d 985, 990-91 (1st Cir. 1988); accord Fireman's
Ins. Co. of Newark, N.J. v. Todesca Equip. Co., Inc., 310 F.3d 32,
38 (1st Cir. 2002).5
5 In any case, Trafon would be unlikely to succeed on the merits
of these claims. It is undisputed that Butterball regularly
submitted invoices to Trafon indicating that their relationship
was not exclusive. Given these repeated and explicit assertions
to the contrary, Butterball is unlikely to "have intentionally
induced the plaintiff to rely upon representations that" their
relationship was exclusive, Matosantos Commercial Corp. v. SCA
Tissue N. Am., LLC, 329 F. Supp. 2d 255, 259 (D.P.R. 2004), or
otherwise created an exclusive agreement by action alone, see
Vulcan Tools of P.R. v. Makita USA, Inc., 23 F.3d 564, 569 (1st
Cir. 1994) ("Law 75 does not operate to convert non-exclusive
distribution contracts into exclusive distribution contracts.").
Trafon contends that its executives never saw these invoices, as
they were handled by clerical employees. Butterball, however,
cannot be faulted for Trafon's failure to read critical information
that it received on a regular basis. See Restatement (Second) of
Contracts § 157 cmt. b ("Generally, one who assents to a writing
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III.
Because the 2009 letter constituted a detrimental act
under Law 75, Trafon's action is time-barred, and the judgment of
the district court is affirmed.
Affirmed.
is presumed to know its contents . . . .").
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