Monday, January 14, 2013

What does exclusivity mean in Law 21? The question should be revisited.

Dear readers, I’d like to start the New Year with a provocative thought.

There is a substantial body of case law holding that a sales representative cannot have an actionable Law 21 claim without an exclusive contract with a manufacturer or grantor. See, e.g., Cruz Marcano v. Sanchez Tarazona, 172 D.P.R. 526 (2007)(adopting a commercial definition of exclusivity). Plain text of Law 21 defines a sales representative as “an independent entrepreneur who with a character of exclusivity establishes a sales representative contract with a principal or grantor…” 10 Laws of P.R. Annot. §279 (a)(translation ours).

One has to wonder- from a public policy standpoint- the legislative wisdom behind the exclusivity requirement in Law 21. After all, Law 21 is patterned after Law 75 and Law 75 does not require exclusivity for an actionable claim brought by a non-exclusive dealer. Further, Law 21 was enacted precisely to provide a remedy to those commercial agents left unprotected by Law 75, Roberco v. Oxford, 88 J.T.S. 102 (1988). It seems counterintuitive that a remedial statute enacted to fill gaps in another special law would leave the beneficiaries, i.e., non-exclusive sales representatives, without a remedy for unjustified actions by their grantors when their dealer counterparts have legal protection. See Statement of Motives, P. of S. 793, December 5, 1990.

Legislative wisdom aside, the plain text of Law 21 requires exclusivity and courts cannot overlook the statute as written, but the question arises what does exclusivity mean? Without statutory or contractual definitions, the word exclusive, by itself, may turn out to be vague or ambiguous, especially in this new age of sales through the internet, the expansion of club stores and the presence of national accounts doing business without borders. Courts have defined exclusivity as limiting the supplier’s right to sell directly or appoint another competing distributor in the territory. Exclusivity can be airtight to prohibit all intra-brand competition or limited in scope by products, clientele, or territory. These are commercial definitions of exclusivity that have been developed from a course of dealings, precedent, commercial contracts, and treatises.

What the cases have left unanswered, however, as the issue may not have been raised, is whether exclusivity is simply a limitation on the supplier’s right to compete or can it be something else. What else could it be? Start with plain text (and the Spanish language controls). The qualifier of exclusivity in §279 (a) appears before not after the definition of the object of the “sales representative agreement” which is the grant of a specific territory or market within Puerto Rico. The statute does not say an “exclusive contract with a principal or grantor”, but rather, defines the sales representative as an “independent entrepreneur quién con carácter de exclusividad (who with a character of exclusivity) establishes a sales representative contract with a principal or grantor…”. Moreover, “sales representative contract” is a defined term in §279(c) and nowhere does that definition mention exclusivity as an element of a claim. Does the order or sequence of the exclusivity qualifier in the plain statutory text make a difference? Certainly, an argument can be made that it does. Had the Legislature intended to define exclusivity as a restriction or self-limitation on the supplier’s grant it would have chosen to add exclusivity after but not before the reference to the sales representative contract.

Then, what does it mean the “character of exclusivity” of the “independent entrepreneur”? In this context, the ordinary meaning of exclusivity is subject to several connotations: “limiting or limited to possession, control, or use by a single group or individual”, “excluding others from participation.” See Merriam-Webster’s on line dictionary. An authoritative Spanish Dictionary, cited in Cruz Marcano, supra, defines exclusivity as “the privilege or right by which a person or entity can do something prohibited to others.” These definitions support the commercial meaning of exclusivity endorsed by the courts. El Diccionario de la Real Academia Espanola (8th ed.) also provides an ordinary meaning definition not mentioned by the Cruz Marcano court which is “único, solo, excluyendo a cualquier otro.” Webster’s alternative definition is similar: “whole, undivided” as in exclusive attention paid by him or her.

Should the text follow a commercial definition, as precedent requires, or should the text be construed by its ordinary meaning, especially when ordinary meaning also has a valid and established commercial use, as in a non-compete obligation by the agent? It is certainly arguable that the character of exclusivity means the “whole, undivided” attention paid by the independent entrepreneur to the supplier’s products to the exclusion of competing products which is akin to a non-compete obligation. A sales representative may have an obligation either not to compete with similar products of the supplier (the “exclusive” character of the agent’s business) or he or she may represent solely the supplier’s products not because it has agreed not to compete but because that is the character of his or her business. Cruz Marcano left the door open for this alternative reasoning because it defines one element of Law 21 as requiring evidence that the agent has “promot[ed] and transact[ed] in an exclusive manner contracts on behalf of a principal...” (translation ours).

Following an ordinary meaning of the word exclusive and assuming the absence of an expressly non-exclusive contract, the “exclusive” entrepreneur (dedicated to serve solely the grantor’s products) that has developed or expanded the market and clientele for the principal's products or services could have an actionable Law 21 termination claim even though the supplier or grantor never granted exclusivity to preclude intra-brand competition. As precedent now stands, these "exclusive" sales representatives, but "non-exclusive" in the commercial sense of the word, would have no relief under Law 21 for an unjustified termination of the relationship.

If it were proper to look at legislative history in this context, it is either inconclusive or suggestive of intent not to exclude agents from protection. There is no discussion about the scope of exclusivity other than to indicate the types of agents that previously had no protection and would have protection now, including representatives of pharmaceutical products (“representantes de fabrica”). There was some discussion not to limit the scope to mercantile transactions but to encompass civil contracts as well. The definition of sales representative underwent modifications as the bill passed through the House and the Senate. Initially, the statute defined the “exclusivity character or not”, see P. of S. 793, May 3, 1990, and the word “no” was deleted from the final bill. While this clearly suggests that a non-exclusive agent would not be protected as supported by plain text, legislative history seems inconclusive on the meaning and scope of exclusivity.

To be sure, non-exclusive sales representatives are left out in the cold unless the Legislature amends Law 21. But a class of agents whose business is solely to represent the principal's products or services, have a leg to stand on, if courts open the envelope and reconsider what exclusivity means.