Caribe Industrial v. National Starch

United States Court of Appeals
For the First Circuit
No. 99-1447
CARIBE INDUSTRIAL SYSTEMS, INC.,
Plaintiff, Appellant,
v.
NATIONAL STARCH AND CHEMICAL COMPANY,
Defendant, Appellee.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF PUERTO RICO
[Hon. Juan M. Perez-Gimenez, U.S. District Judge]
Before
Lynch, Circuit Judge,
Campbell, Senior Circuit Judge,
and O'Toole, District Judge.*
Eric Perez-Ochoa, with whom Anabelle Rodriguez Rodriguez and
Martinez Odell & Calabria were on brief for appellant.
Jaime E. Toro-Monserrate, with whom McConnell Valdes was on
brief for appellee.
*Of the District of Massachusetts, sitting by designation.
May 8, 2000
CAMPBELL, Senior Circuit Judge. Plaintiff-appellant
Caribe Industrial Systems Inc. (“Caribe”) sued its principal,
defendant-appellee National Starch and Chemical Company
(“National”), under the Puerto Rico Dealer’s Act. The district
court dismissed Caribe’s complaint for failure to state a claim,
holding that National did not violate the Dealer’s Act by
selling goods directly to Checkpoint Systems, Inc.
(“Checkpoint”), a company with which Caribe had been dealing.
We affirm the decision below, although on different grounds than
those stated by the district court.
I. BACKGROUND
In its complaint, Caribe alleges the following facts:
National manufactures adhesive products, which are sold through
a network of distributors. Caribe is a Puerto Rican distributor
that markets and sells industrial packaging machinery and
materials, including adhesive products.
On August 1, 1983, Caribe and National entered into a
written Distributor Agreement (“the Agreement”), wherein
National agreed to supply and Caribe agreed to distribute
certain adhesive products in a designated territory. Caribe
agreed to be a “non-exclusive” distributor of National’s product
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line in Puerto Rico. The Agreement provided in Article 2 that
“Distributor’s territory shall be non-exclusive territory.”2 The
Agreement further provided, in Article 7, that “National
reserves the right to sell the Products directly to its
customers.” Notwithstanding the non-exclusivity provisions,
Caribe was the sole distributor of National’s products in Puerto
Rico for approximately fourteen years.
Beginning in 1993, Caribe sold National’s “hot melt”
adhesive products to Checkpoint. Caribe obtained Checkpoint’s
business through its promotional and marketing efforts, and its
sales to Checkpoint represented approximately sixty percent of
Caribe’s total sales of adhesives. In December 1996, Checkpoint
and Caribe executed an open-ended purchase order that terminated
in December 1997.
In or around March of 1997, Checkpoint informed Caribe
that it intended to locally manufacture the hot melt adhesives
that it had been purchasing from Caribe. Caribe attempted to
dissuade Checkpoint from doing so. On or around March 26, 1997,
2The Agreement was attached as an exhibit to Caribe’s
complaint in this action, and so we consider it incorporated by
reference. Although the parties mention other documents beyond
the complaint and Agreement, the district court apparently did
not consider any such materials, and nor will we. See Fed. R.
Civ. P. 12(b); 5A Charles Alan Wright and Arthur R. Miller,
Federal Practice and Procedure § 1366 (2d ed. 1990)
(consideration of matters outside pleadings converts Rule
12(b)(6) motion into summary judgment motion).
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Caribe met with Checkpoint to “discuss the situation and to
attempt to discourage [Checkpoint] from manufacturing the
products.” Checkpoint stated at this meeting that it had
already ordered equipment to manufacture the adhesives. Hence,
Caribe and Checkpoint were unable to reach agreement.
Caribe notified National of Checkpoint’s plans.
National initially expressed skepticism as to Checkpoint’s
ability to manufacture its own adhesives. Together, Caribe and
National “attempted to seek economically viable alternatives
that would convince Checkpoint not to engage in the
manufacturing of hot melt adhesives. . .” In or around April
1997, National told Caribe that in response to Checkpoint’s
actions, it wished to lower its prices. Caribe responded by
offering to reduce its profits to make its products more
economically attractive to Checkpoint, and to exclude the
Checkpoint account from the distributorship arrangement. Caribe
drafted and sent a “Memorandum of Understanding” to National
setting forth these proposals. National rejected Caribe’s
proposals, asking Caribe to take a larger cut in profits
instead. Caribe refused to do so.
National and Checkpoint met in May, 1997, to discuss
Checkpoint’s announcement that it would be making adhesives in-
house. At this time, National became convinced that Checkpoint
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indeed had the capacity to manufacture its own adhesives. On
June 26, 1997, National told Caribe that it had met privately
with Checkpoint earlier that month. At that meeting, National
and Checkpoint had agreed that instead of manufacturing the
adhesives itself, Checkpoint would buy them directly from
National, omitting Caribe from the distribution chain.
In June, 1997, Checkpoint told Caribe that effective
June 30, 1997, it would be buying materials directly from
National without an intermediary. Checkpoint agreed, however,
to honor a ninety-day cancellation clause in the open-ended
purchase order. On July 25, 1997, Checkpoint sent another
letter “officially” terminating the purchase order. Checkpoint
bought hot melt adhesives directly from National beginning in
September or October, 1997.
On September 29, 1997, Caribe filed a complaint in the
federal district court for the District of Puerto Rico against
National, seeking damages and provisional relief pursuant to the
Puerto Rico Dealer's Act of June 24, 1964 ("Law 75"), P.R. Laws
Ann. tit. 10, § 278 et seq. Caribe contended that National
violated Law 75 by performing acts detrimental to the
established relationship between the parties by setting up its
own distribution system directly with Checkpoint.
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On October 29, 1997, National filed a motion to dismiss
for failure to state a claim pursuant to Fed. R. Civ. P.
12(b)(6). National contended that it did nothing wrong by
entering a direct relationship with Checkpoint, because
Checkpoint had already terminated its customer relationship with
Caribe and the Agreement was non-exclusive. Caribe opposed the
motion to dismiss and amended its complaint to add a cause of
action for tortious interference with a contractual
relationship.
On February 23, 1999, the district court allowed
National’s motion to dismiss, although based on somewhat
different reasoning than that advanced by National. See Caribe
Indus. Sys., Inc. v. National Starch & Chem. Co., 36 F. Supp. 2d
448 (D.P.R. 1999). It characterized the issue before it as
“whether a non-exclusive distribution agreement under Law 75,
although flexible to allow multiple distributors, nevertheless
forbids the principal from supplying its products directly to
the customers of its own distributors.” Id. at 450. It
concluded that no cause of action lies under Law 75 where a
principal sells directly to a customer of a non-exclusive
dealer. The district court also held that Caribe did not state
a claim for tortious interference with a contractual
relationship. Caribe appeals.
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II DISCUSSION
We apply “a de novo standard of review to a district
court's allowance of a motion to dismiss for failure to state a
claim.” New England Cleaning Servs., Inc. v. American
Arbitration Ass'n, 199 F.3d 542, 544 (1st Cir. 1999) (citation
omitted). Caribe contends that the district court incorrectly
applied Rule 12(b)(6) in that it failed to take as true the
allegation that Checkpoint was Caribe’s customer, not National’s
customer. In Caribe’s view, this distinction made it improper
for National to sell directly to Checkpoint, notwithstanding the
Agreement’s non-exclusivity. Caribe contends that the provision
in Article 7 stating that “National reserves the right to sell
the Products directly to its customers” (emphasis supplied)
should be read as limiting National’s sales to those who are not
the customers of its distributors. In support of that argument,
Caribe suggests that Checkpoint remained its customer even after
Checkpoint announced its intention to discontinue purchasing
product from Caribe. Caribe further argues that the court
misapplied controlling case law in concluding that National did
not perform any acts detrimental to the established relationship
between the parties.
Puerto Rico's Law 75 governs the business relationship
between principals and the locally appointed distributors who
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market their products. See Irvine v. Murad Skin Research Labs.,
Inc., 194 F.3d 313, 317-18 (1st Cir. 1999). In order to avoid
the inequity of arbitrary termination of distribution
relationships once the distributor has developed a local market
for the principal's products or services, Law 75 limits the
principal's ability to unilaterally end the relationship except
for "just cause." P.R. Laws Ann. tit. 10, § 278a. In 1966, the
protection afforded to distributors under Law 75 was extended to
include the conduct of a principal “detrimental to the
established relationship,” even where the contract was not
terminated. See id.; see also Irvine, 194 F.3d at 317-18.
In the present case, National did not terminate
Caribe’s status as a distributor of its products. The sole
issue is whether National engaged in conduct detrimental to the
distribution relationship. See P.R. Laws Ann. tit. 10, § 278a.3
“The question whether there has been a ‘detriment’ to the
existing relationship between supplier and dealer is just
another way of asking whether the terms of the contract existing
between the parties have been impaired.” Vulcan Tools of Puerto
Rico v. Makita U.S.A., Inc., 23 F.3d 564, 569 (1st Cir. 1994).
3
Section 278a provides: “Notwithstanding the existence in a
dealer’s contract of a clause reserving to the parties the
unilateral right to terminate the existing relationship, no
principal or grantor may directly or indirectly perform any act
detrimental to the established relationship . . .”
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Hence, the parameters of Caribe’s Law 75 rights, as the district
court correctly noted, are established by the terms of
Agreement. “[T]he ‘established relationship’ between dealer and
principal is bounded by the distribution agreement, and
therefore the Act only protects against detriments to
contractually acquired rights.” Id. (citation omitted).
The district court framed Caribe’s legal argument as
follows:
(1) Even if Caribe has a non-exclusive
distributorship agreement with National, National
cannot sell directly to Caribe's clients. (2)
Checkpoint would have never ceased purchasing
adhesives from Caribe had National never offered
them directly to Checkpoint. (3) National's
appropriation of Caribe's clientele violates
Puerto Rico's Law 75.
Caribe Indus. Sys., Inc., 36 F. Supp. 2d at 450. The court went
on to state, “Since the second step of the progression is
inherently a question of fact, for purposes of resolving this
motion to dismiss it shall be assumed that had it not been for
National's direct selling efforts, Checkpoint would have
remained as Caribe's customer.” Id. The district court then
concluded that Caribe had no cause of action for impairment
under Law 75 because the Agreement established a non-exclusive
distribution arrangement and permitted National to sell directly
to its customers. Id. at 450-51.
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We disagree that the facts set forth in the complaint
support an inference that Checkpoint would never have stopped
purchasing adhesives from Caribe had National not made direct
selling efforts. What is plain from the pleaded facts is that
Checkpoint had made clear that it would no longer purchase
adhesives from Caribe -- i.e., that Checkpoint effectively
announced its plans to end its existing customer relationship
with Caribe -- before it entered a new arrangement to purchase
products directly from National.
According to the allegations in the complaint,
Checkpoint informed Caribe that it intended to locally
manufacture its own hot melt adhesives in March of 1997. This
assertion was further supported at a meeting on March 26, 1997,
when Checkpoint told Caribe that it had already ordered
equipment to manufacture the adhesives. Caribe’s efforts at
that meeting to dissuade Checkpoint failed. Thus, it was clear
at this point that unless Checkpoint somehow could be persuaded
to reconsider its new, in-house plans, Caribe’s status as a
dealer supplying Checkpoint with National’s product was at an
end. Caribe obviously recognized this; otherwise, there would
have been no need, in Caribe’s own words, for Caribe to
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“attempt[] to convince Checkpoint . . . to continue to buy
product from them.”4
National did not enter into its own arrangement with
Checkpoint until May or June of 1997. National’s arrangement
occurred some months after Checkpoint had informed Caribe that
it had already purchased manufacturing equipment, thus making it
plain that it would no longer need to buy hot melt adhesives
from Caribe. There are no facts pleaded in the complaint to
suggest that National initiated action to steal Checkpoint’s
ongoing business away from Caribe.
Caribe argues that we should infer that Checkpoint
would not have ended its customer relationship with Caribe had
National not “persuaded” Checkpoint to enter into a direct
relationship. This, however, cannot be reasonably inferred from
Caribe’s pleaded facts. See Correa-Martinez v.
Arrillaga-Belendez, 903 F.2d 49, 58 (1st Cir. 1990) (no need to
strain against plausibility in construing complaint). Those
facts indicate that Checkpoint had already communicated that it
would no longer proceed with its relationship with Caribe. It
4Caribe argues that National also was involved in efforts to
convince Checkpoint not to manufacture its own adhesives and
continue purchasing National products from Caribe. It is true
that Caribe pleaded these facts in its complaint, but we fail to
see how these facts contravene a conclusion that Checkpoint had
already made clear that it would be discontinuing its existing
purchasing arrangement with Caribe.
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is entirely conjectural that, had National stayed out of the
picture, Caribe eventually could have negotiated terms with
Checkpoint sufficiently attractive for Checkpoint to have
abandoned its stated plans to manufacture its own adhesives.
Thus, while we take as true that Checkpoint once had been
Caribe’s customer, we must conclude that Checkpoint effectively
ceased to be its customer after Checkpoint announced its in-
house manufacturing plans.
In these circumstances, we see no provision in the
Agreement that prohibited National’s direct sales to Checkpoint.
The only potentially relevant provision is Article 7, which
permits National to sell to “its customers.” Under this
language, it might be argued (whether or not correctly, we need
not decide) that a company that was purchasing National’s
materials from a distributor could not be also a “customer” of
National (viz. because it was already the distributor’s
customer). Under that theory, the Agreement arguably might be
ambiguous as to whether it prevented National from dealing
directly with Checkpoint while the latter remained Caribe’s
customer.
But here, as noted, the complaint makes it abundantly
plain that Checkpoint had already effectively ended its existing
customer relationship with Caribe. Hence, nothing in the terms
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of the Agreement prohibited National from entering a new
arrangement with Checkpoint. Under these circumstances,
National’s actions cannot be found to have violated the
Agreement so as to impair Caribe’s relationship with Checkpoint.5
See Caribbean Wholesales & Serv. Corp. v. U.S. JVC Corp., 963 F.
Supp. 1342, 1351-52 (S.D.N.Y. 1997) (where customer
independently decided to stop purchasing products from
distributor, principal did not cause detriment within meaning of
Law 75).
Since there has been no impairment of the terms of the
contract, there is no Law 75 liability. See Vulcan Tools, 23
F.3d at 569. Accordingly, we affirm the district court,
although on the narrower grounds set forth.6 We need not reach,
5
The only “impairment” Caribe can conceivably assert is to
its hope that Checkpoint would still change its mind, despite
the fact that Caribe’s efforts at persuasion were theretofore
unsuccessful. Caribe’s argument boils down to saying that its
prior customer relationship with Checkpoint gave it some sort of
right, notwithstanding the Agreement’s non-exclusivity, to act
exclusively for National in seeking to recapture Checkpoint’s
business. Under this approach, if Caribe were not able to
persuade Checkpoint to purchase National’s product through it,
then National would have no recourse but to accept the loss of
Checkpoint’s business. We see nothing in the terms of the
Agreement that imposes such an extreme restriction on National’s
right to sell directly. Cf. Vulcan Tools, 23 F.3d at 569. We
cannot read the “its customers” language as implying such a
sweeping barrier given the language’s lack of explicitness and
the non-exclusivity provisions elsewhere in the Agreement.
6
Initially, Caribe made the additional argument that it was
entitled to a presumption of impairment under Section 278a-1(b)
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and do not now decide, the broader question addressed by the
district court, i.e. whether National could have sold goods
directly to Checkpoint at a time when Checkpoint was Caribe’s
ongoing customer.
Finally, Caribe does not argue on appeal that the
district court erred in dismissing its claim of tortious
interference with a contractual relationship. Accordingly, we
affirm the dismissal of that claim as well.
Affirmed.
of Law 75 by alleging that National engaged in private meetings
with Checkpoint that resulted in a direct selling arrangement.
National pointed out that the 1988 amendments to Law 75 that
established the relevant presumption do not apply to preexisting
contracts such as the one between it and Caribe. Caribe
concedes this point in its reply brief, and we need not deal
with it further.
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