
USCA1 Opinion

	




                            UNITED STATES COURT OF APPEALS                                FOR THE FIRST CIRCUIT                                                                                      ____________________        No. 95-2177                            R. W. INTERNATIONAL CORP. AND                             T. H. WARD DE LA CRUZ, INC.,                                     Appellants,                                          v.                                  WELCH FOODS, INC.,                                      Appellee.                                                                                      ____________________                     APPEAL FROM THE UNITED STATES DISTRICT COURT                           FOR THE DISTRICT OF PUERTO RICO             [Hon. Gilberto Gierbolini-Ortiz, Senior U.S. District Judge]                                              __________________________                                                                                      ____________________                                        Before                                 Cyr, Circuit Judge,                                      _____________                           Campbell, Senior Circuit Judge,                                     ____________________                              and Boudin, Circuit Judge.                                          _____________                                                                                      ____________________             Jos  A. Hern ndez Mayoral for appellants.             _________________________             Gilberto J. Marxuach-Torr s,  with whom  Samuel T. C spedes,  Ana             ___________________________              __________________   ___        Matilde Nin, and McConnell Valdes were on brief for appellee.        ___________      ________________                                                                                      ____________________                                    July 10, 1996                                                                                      ____________________                    CYR, Circuit Judge.   R.W. International Corp. and T.H.                    CYR, Circuit Judge.                          _______ _____          Ward  de la Cruz, Inc.  (collectively:  "R.W.")  appeal a summary          judgment dismissing their claim  that Welch Foods, Inc. ("Welch")          unilaterally terminated  its  dealership contract  with  R.W.  in          violation  of the Puerto  Rico Dealers' Contracts  Act, P.R. Laws          Ann. tit.  10,   278  ("Law 75").   We affirm the  district court          judgment.                                     BACKGROUND1                                     BACKGROUND                                     __________                    Welch  is a  major fruit  juice manufacturer  which has          sold its products in Puerto Rico since the 1930's through various          local  distributors.  On March 25, 1988, Welch designated R.W. as          its  new Puerto  Rico distributor  for frozen  juice concentrate.          While the parties  continued to  negotiate the terms  of a  final          dealership  contract, R.W. began  distributing Welch  products to          over 500 retail stores throughout Puerto Rico.                      Prior to R.W.'s  designation as its  distributor, Welch          had expressed  concern about  R.W.'s insistence on  continuing to          distribute "Donald  Duck" frozen  juice concentrate,  a competing          brand,  and on its plans  to begin distribution  of "Donald Duck"          bottled juice products in  January 1989.  Consequently,  R.W. had          agreed,  in  principle,  to  take various  measures  designed  to          alleviate Welch's concerns, including a one-year trial dealership                                        ____________________               1The  facts are stated in the light most favorable to appel-          lant  R.W.  The  reader is referred to  our two earlier decisions          for additional detail.  See R.W. Int'l Corp. v. Welch Food, Inc.,                                  ___ ________________    ________________          13 F.3d 478 (1st Cir.  1994); R.W. Int'l Corp., 937 F.2d  11 (1st                                        ________________          Cir. 1991).                                            2          during which R.W.  would give Welch's  frozen juice product  full          marketing  priority and  support, increase  Welch's sales  by 15%          over 1987  sales figures, and  contribute $50,000 toward  a joint          advertising promotion of Welch's juice products.  Notwithstanding          their agreement in principle, final contract negotiations between          the  parties immediately  and unexpectedly became  contentious in          several peripheral  respects which  remained unresolved for  more          than a year.2                     In  January 1989,  after  R.W.  began its  long-planned          expansion of the "Donald Duck" distribution line to include  both          frozen and bottled juices, Welch  employees noticed that (i) R.W.          had included an advertisement  for Donald Duck frozen juice  in a          supermarket "shopper" publication,  while omitting an  advertise-          ment for Welch frozen juice; (ii) "on various occasions" R.W. had                   _____          stocked  Welch frozen juice on the bottom shelves of retail store                   _____          freezer cases, while placing Donald Duck frozen juice at customer          eye-level;  and (iii)  R.W.'s average  monthly sales  figures for          Welch products during January-February 1989 fell by approximately          14% from its average monthly sales figures for 1988.3                                          ____________________               2The matters in contention included whether:   R.W. would be          Welch's exclusive  Puerto Rico  dealer during the  one-year trial          period; New York  or Puerto  Rico law would  govern any  contract          dispute;  R.W. would  "assume"  the  "grandfathered" contract  of          Welch's previous dealer, thereby avoiding application of Law 75.               3During  the one-year  dealership relationship,  Welch juice          sales were as follows:               April 1988          1900 cases          $ 42,770               May 1988            3060 cases          $ 70,354               June 1988           2983 cases          $ 63,971               July 1988           3005 cases          $ 64,056                                          3                    On  March 30,  1989,  Welch  discontinued the  yearlong          contract negotiations and unilaterally terminated  R.W.'s dealer-          ship.   Welch  pointed to  the "conflicts  of interest  of [R.W.]          representing both competing lines  [i.e., Welch and Donald Duck],          [which] are significant and irreconcilable, [and] [a]n  increased          level of conflict in personal relations between [us]."                    In  April 1989,  R.W. filed  this action  alleging that          Welch's unilateral termination of the dealership violated Law 75,          which provides:                     Notwithstanding the existence  in a  dealer's                    contract of a clause reserving to the parties                    the unilateral right to terminate  the exist-                    ing relationship, no principal or grantor may                    directly or indirectly perform any act detri-                    mental [i.e., unilateral termination]  to the                    established relationship or  refuse to  renew                    said contract  on its normal  expiration, ex-                                                              ___                    cept for just cause.                    ____ ___ ____ _____          P.R.  Laws Ann. tit. 10,    278a (1976  and Supp. 1989) (emphasis          added).   The district  court initially entered  summary judgment          for Welch  on the ground  that Law 75  afforded no  protection to          dealers  unless a  final,  written "dealer's  contract" has  been          executed by the parties.  On remand following our vacation of the                                        ____________________               August 1988         3093 cases          $ 66,983               September 1988      2607 cases          $ 54,809               October 1988        2866 cases          $ 61,022               November 1988       2312 cases          $ 49,619               December 1988       2587 cases          $ 55,220               January 1989        2471 cases          $ 52,189               February 1989       2284 cases          $ 48,687               March 1989          2955 cases          $ 72,640          Although  R.W. notes that sales figures  rebounded in March 1989,          Welch made  its determination to  terminate contract negotiations          before month-end.                                          4          district  court judgment, see R.W. Int'l, 13 F.3d at 486 (holding                                    ___ __________          that  the broad definition of "dealer's contract" in Law 75 would          comprehend dealers actually engaging in  product distribution for          a principal, albeit  only through a  course of dealing  preceding                       ______          the  execution of a final contract), Welch renewed its motion for          summary  judgment.   It  contended that  the undisputed  evidence          established that R.W.'s demonstrated conflict of interest consti-          tuted  "just cause," under Law 75, for terminating their one-year          dealership.    The  district  court once  again  entered  summary          judgment for Welch and R.W. appealed.                                     DISCUSSION4                                     DISCUSSION                                     __________                    The Puerto  Rico Legislature  enacted Law  75 believing          that traditional contract-law  principles had not afforded  local          dealers  adequate  protection   from  arbitrary   dealer-contract          terminations by larger, primarily mainland-based principals which          normally enjoy a superior bargaining position.  See  Vulcan Tools                                                          ___  ____________          of P.R.  v.  Makita U.S.A.,  Inc.,  23 F.3d  564,  568 (1st  Cir.          _______      ____________________          1994).5   The Legislature  therefore prohibited a  principal from                                        ____________________               4We will uphold a grant of summary judgment if the competent          evidence discloses no genuine issue of material fact and Welch is          entitled to judgment as a matter of law.  See Fed. R. Civ. P. 56;                                                    ___          Casas Office Machs.,  Inc. v.  Mita Copystar Am.,  Inc., 42  F.3d          __________________________     ________________________          668, 678 (1st Cir.  1994).  The materiality of any  disputed fact          in genuine dispute is determined  through reference to the appli-          cable  substantive law, in  this case, Law  75.  See  Anderson v.                                                           ___  ________          Liberty Lobby, Inc., 477 U.S. 242, 248 (1986).          ___________________               5The  statement of  motives in  Law 75  reads, in  pertinent          part: "The Commonwealth of  Puerto Rico cannot remain indifferent          to  the growing  number of  cases in  which domestic  and foreign          enterprises, without just cause, eliminate their dealers, conces-          sionaires  or agents, as soon  as these have  created a favorable                                          5          unilaterally  terminating an  established dealership  "except for          just cause."  See P.R. Laws Ann. tit. 10,   278a.  Law 75 defines                        ___          "just cause"  as either "nonperformance  of any of  the essential                           ______          obligations  of the dealer's contract, on the part of the dealer,          or any action or  omission on [the dealer's] part  that adversely          __          and  substantially  affects  the  interest of  the  principal  or          grantor in promoting  the marketing or  distribution of the  mer-          chandise or service."  Id.   278 (emphasis added).                                   __                    Ultimately, "just cause" under Law  75 is a question of          fact, see La Playa  Santa Marina, Inc. v. Chris-Craft  Corp., 597                ___ ____________________________    __________________          F.2d  1,  4 (1st  Cir. 1979),  as are  the subsidiary  issues (i)          whether the  contracting parties considered  the particular  con-          tract  obligation allegedly breached by  the dealer to be "essen-          tial,"  see  Biomedical Instrument  and  Equip.  Corp. v.  Cordis                  ___  _________________________________________     ______          Corp., 797 F.2d 16, 18 (1st  Cir. 1986), see also PPM Chem. Corp.          _____                                    ___ ____ _______________          of P.R.  v. Saskatoon Chem.,  Ltd., 931  F.2d 138, 140  (1st Cir.          _______     ______________________          1991),  or (ii) whether  any other "non-breaching"  acts or omis-          sions by  the dealer  were nonetheless sufficiently  egregious to          have "adversely and substantially  affect[ed] the interest of the          principal or  grantor in promoting the  marketing or distribution          of the merchandise or service,"   Pan Am. Computer Corp. v.  Data                                            ______________________     ____          Gen. Corp., 652 F.2d 215, 217 n.2 (1st Cir. 1981);  La Playa, 597          __________                                          ________          F.2d at 3 (upholding  final judgment for dealer, despite  its two          "minor" contract breaches).  Moreover, once a dealer demonstrates                                        ____________________          market and  without taking  into account their  legitimate inter-          ests."                                           6          that its  principal unilaterally  terminated their  contract, the          principal  must carry  the burden  of persuasion  on the  factual          elements of the "just  cause" showing.  Newell Puerto  Rico, Ltd.                                                  _________________________          v. Rubbermaid Inc., 20 F.3d 15, 22 (1st Cir. 1994); La Playa, 597             _______________                                  ________          F.2d at 3-4.                    R.W. does  not contest the historical  facts upon which          Welch  based its  claim that  R.W. operated  under a  conflict of          interest  adverse to  Welch's long-term  interests: R.W.'s  lower          sales of  Welch products during January-February  1989, see supra                                                                  ___ _____          note 3; R.W.'s failure to include  a Welch sales promotion in  an          issue of  a supermarket "shopper" which  carried an advertisement          for  Donald  Duck's  competing  products;  and  its  "occasional"          placement of  Welch products in freezer  positions less favorable          and  less   consumer-friendly  than  the  Donald  Duck  products.          Rather,  R.W. merely  argues that  divergent inferences  might be          drawn  from  these undisputed  facts,  bearing on  the  issues of          "essentiality" and "adversity" upon which Welch would be required          to bear  the burden of proof  at trial, and  that these competing          inferences generated  trialworthy issues not  amenable to summary          judgment.6                    Even conceding the reasonableness of any such competing          inferences,  however, R.W.'s  protestation that  it committed  no                                        ____________________               6For example,  the  parties  dispute  whether  their  mutual          "contractual" commitment to  contribute $50,000 apiece to  adver-          tise Welch frozen concentrate was to be performed during the one-          year  trial period  following R.W.'s  March 1988  designation, or          whether this commitment would accrue only during a one-year trial          period  commencing  from  the  date a  final  written  dealership          contract was signed.                                            7          cognizable breach of "contract," or other act or omission  suffi-          ciently  "adverse"  to  Welch's  business  interests  to  warrant          termination,  would  not  preclude  summary judgment  for  Welch.          Although  Law  75, by  its plain  terms,  makes the  "just cause"          inquiry  turn solely on  the dealer's  actions or  omissions, see                                       ________                         ___          P.R. Laws Ann. tit. 10,   278,  the Puerto Rico Supreme Court has          read a "third" "just  cause" into the statute to  avoid constitu-          tional invalidation,  by holding  that a principal's  own circum-          stances  may  permit its  unilateral  termination  of an  ongoing          dealership, irrespective  of the dealer's conduct.   See Medina &                                                               ___ ________          Medina  v. Country Pride Foods,  Ltd., 858 F.2d  817, 822-23 (1st          ______     __________________________          Cir. 1988) (responding to  question certified in 825 F.2d  1 (1st          Cir. 1987)).                     After the principal in Medina  unsuccessfully attempted                                           ______          in protracted  good-faith negotiations to adjust  its business to          changed market conditions by renegotiating price and credit terms          with its long-time  dealer, it decided to terminate  the dealer's          contract, and  withdraw from the Puerto Rico market.  Id. at 818-                                                                ___          19.   The Medina court noted that an overly restrictive interpre-                    ______          tation of Law 75's "just cause" requirement could place a princi-          pal in  a  serious  dilemma  under such  circumstances:    either          capitulate to the  dealer's price  and credit terms  and be  held          hostage in an interminable dealership relationship on disadvanta-          geous terms,  or unilaterally  terminate the contract  and expose          itself to  a costly lawsuit  under Law  75.   Id. at  822 &  n.4.                                                        ___          Where  the principal intends  to retire entirely  from the Puerto                                          8          Rico market, however, little  if any danger exists that  the sort          of  exploitation proscribed by Law 75 can occur, since the retir-          ing  principal  cannot  hope  to  appropriate  prospectively  the          product goodwill created by its dealer in the Puerto Rico market.          Id.  at  823.    Thus, where  the  principal  offers "reasonable"          ___          contract terms, but nonetheless arrives at a bona fide impasse in                                                       ____ ____          the negotiations,  barring unusual circumstances not present here          Medina  ordains a determination  that there was  "just cause" for          ______          the unilateral dealership termination by the principal.  See id.;                                                                   ___ ___          see  also Borg Warner Int'l  Corp. v. Quasar  Co., No. CE-94-182,          ___  ____ ________________________    ___________          slip op. at 10 n.8 (P.R. Mar. 14, 1996) (Official Translation).                    "Absent  controlling state  court precedent,  a federal          court sitting in diversity  may . . . predict[] .  . . the course          the state courts would take [if] reasonably clear."  VanHaaren v.                                                               _________          State Farm  Mut. Auto. Ins. Co.,  989 F.2d 1, 3  (1st Cir. 1993).          _______________________________          In  fact,  this  court predicted  earlier  that  upon remand  and          further discovery Welch's  asserted reasons for terminating  R.W.          might constitute "just cause" as enunciated in Medina:                                                          ______                    [W]e fail  to see how applying Law  75 in the                    circumstances of this case  necessarily would                    require  Welch to continue  a relationship it                    does not want  in a  manner to  which it  has                    serious objections.  Law 75 simply requires a                    supplier to justify its decision to terminate                    a    dealership.        If    Welch's    con-                    flict-of-interest  concerns  about  R.W.  are                    legitimate, we have no  doubt that this would                    constitute "just  cause" under Law 75.  . . .                    Medina  &  Medina is  not precisely  on point                    _________________                    because it involved a supplier's  decision to                    totally  withdraw from the Puerto Rico market                    following good-faith negotiations that failed                    to  achieve  agreement  between the  parties.                    There is  no indication  here that  Welch in-                                          9                    tended to leave the market rather than find a                    new  dealer.   Nevertheless,  we believe  the                    principle  underlying Medina  & Medina  is e-                                          ________________                    qually  applicable  in  these  circumstances,                    i.e., that a supplier  has just cause to ter-                               _ ________  ___ ____ _____ __ ____                    minate if it has  bargained in good faith but                    ______ __ __ ___  _________ __ ____ _____ ___                    has not  been able "to reach  an agreement as                    ___ ___  ____ ____  __ _____  __ _________ __                    to  price, credit,  or  some other  essential                    __  _____  ______   __  ____ _____  _________                    element of  the dealership."   This would  be                    _______ __  ___ __________                    true at least where,  as here, the supplier's                    market  in Puerto  Rico was  well established                    before  the  current dealer  relationship and                    the supplier's action therefore "is not aimed                    at reaping the good will or  clientele estab-                    lished by the dealer."           R.W. Int'l Corp., 13 F.3d at 484 & n.4 (emphasis added).            ________________                    Our discussion  did not  suggest that the  "good faith"          inquiry  necessarily would  be amenable  to summary  judgment, of          course.  Nonetheless, whereas the ultimate burden to  prove "just          cause" under  the two-part statutory definition  resides with the                                     _________          principal  (i.e., Welch),  see Newell,  20 F.3d  at 22,  the bona                                     ___ ______                        ____          fides of contract negotiations must be presumed under Puerto Rico          _____          law.   See  Borg  Warner,  No. CE-94-182,  slip  op.  at 10  n.8.                 ___  ____________          Consequently,  at trial R.W.  would bear the  burden to establish          Welch's  bad faith for purposes of the Medina "just cause" deter-                                                 ______          mination.                     R.W.  has not met its burden as a nonmoving party under          Fed. R. Civ. P. 56.  See Celotex Corp.  v. Catrett, 477 U.S. 317,                               ___ _____________     _______          322 (1986) (if the nonmovant would bear the burden of  proof on a          particular  issue  at trial,  its  failure  to adduce  sufficient          evidence  to  demonstrate  its trialworthiness  warrants  summary          judgment for the  movant); Smith  v. Stratus  Computer, Inc.,  40                                     _____     _______________________          F.3d  11, 12  (1st  Cir. 1994),  cert.  denied, 115  S.  Ct. 1958                                           _____  ______                                          10          (1995).  As  R.W. proffered  no competent evidence  to rebut  the          historical facts  relied on  by Welch  to justify  its unilateral          termination      i.e.,  declining  sales figures,  the  "shopper"          omission, or the  bottom-shelf freezer placements    we need only          ask  whether a rational jury  could find mala  fides or unreason-                                                   ____  _____          ableness  on the  part  of Welch  in  determining that  R.W.  was          representing conflicting interests.                     Even before  R.W.'s March 1988 designation,  Welch made          clear that  it appreciated R.W.'s distribution  capabilities, but          was  extremely wary of its  handling of Donald  Duck frozen juice          concentrate and  of its plans  to begin distributing  Donald Duck          bottled juice  in January 1989.   In order to get  the Welch con-          tract,  Thomas Ward,  R.W.'s  president, agreed  to the  one-year          trial  period,  the  sales-volume  commitments,  and  the  mutual          advertising expenditures.   The parties understood  that the one-          year  trial period would allow Welch to assess whether R.W. could          distribute Donald  Duck products while meeting  its obligation to          provide full  marketing support for  Welch products.   In January          1989, however,  there were strong signals that  R.W. was shifting          its  primary attention to its newly expanded Donald Duck line, at          Welch's  expense.   Although R.W.  plausibly suggests  that these          indicia were  either ambiguous,  anecdotal, or  aberrational, and          that genuine factual issues  may well remain as to  whether these          indicia  signaled  a  "contract"  breach  or  other  sufficiently          "adverse"  action by R.W.  under P.R. Laws  Ann. tit.  10,   278,          R.W.  has not shown that it was unreasonable for Welch, acting in                                          11          presumed good  faith, to interpret these signals  as portending a          troubled business  relationship ahead,  and to withdraw  from it.          Cf. Newell, 20 F.3d  at 23 (upholding verdict for  dealer because          ___ ______          principal  had known for twenty-three  years that dealer had been          marketing  competing product).   Given that  Welch already  had a          fifty-year presence  in the Puerto Rico  market before appointing          R.W. in 1988, and that the parties reached a bona fide impasse on                                                       ____ ____          an  essential modification to the terms of their ongoing dealer's          "contract" (i.e., whether R.W. would continue to handle competing          product lines), we conclude  that a rational jury could  not find          that Welch acted  in "bad faith."   Accordingly, summary judgment          was proper.                    The judgment is affirmed.                    The judgment is affirmed.                    ________________________                                          12
