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US District Court in Puerto Rico Rejects Distributor’s Efforts to Hold Wholesalers Liable for a Terminated Agreement Under Puerto Rico Law 75
Monday, June 24, 2024

In Meta Med, LLC, et al., v. Insulet Corporation, et al., Lyvette Mercado Velez, a dietitian, entered into a distribution agreement with Insulet Corporation, a medical device manufacturer, to promote and sell its diabetes treatment products and services in Puerto Rico. Soon after, Mercado established Meta Med, LLC and signed a separate distributor agreement with Insulet.

After Insulet formed distributor relationships with both Mercado and Meta Med, Insulet enlisted wholesale distributors GEMCO Medical and DDP Medical Supply to resell Insulet’s products to Mercado and Meta Med. Insulet ultimately terminated Mercado and Meta Med’s distributorships setting off litigation with multiple claims between and among the parties.

Mercado and Meta Med alleged their relationships with Insulet, GEMCO, and DDP were protected under Puerto Rican Law 75 and, in the alternative, Law 21 and brought three causes of action against Insulet, GEMCO, and DDP, and sought a declaratory judgment.

Insulet, GEMCO, and DDP filed motions to dismiss.

Mercado and Meta Med’s Law 75 Claims

In Puerto Rico, Law 75 regulates the relationships between distributors and manufacturers or so-called “principals.” The statute is meant to prevent manufacturers from arbitrarily terminating a distribution arrangement without just cause after a distributor has built a beneficial market for the manufacturer.

The Court Granted GEMCO and DDP’s Motion to Dismiss with Prejudice

Mercado and Meta Med argued that Law 75 applied to GEMCO and DDP because they were an integral part of the relationship with Insulet and, thus, “principals” under Law 75 as well as Insulet. Mercado and Meta Med argued that GEMCO and DDP had a higher level of control over Insulet’s products than typical wholesalers. The Court disagreed, finding that Insulet authorized GEMCO and DDP’s actions. Additionally, the Court reiterated that Law 75 specifically limited liability to manufacturers. The Court held that even though GEMCO and DDP were an integral participant in the distribution chain, they were not manufacturers. Thus, Law 75 did not apply to them. Therefore, the Court dismissed the first cause of action against GEMCO and DDP.

The Court Granted Insulet’s Motion to Dismiss Mercado’s Claims

The Court dismissed Mercado’s claims against Insulet because Puerto Rico was the improper forum. The agreement between Mercado and Insulet contained a mandatory forum selection clause requiring Massachusetts as the forum for all claims arising out of the agreement. However, Mercado argued that it and Meta Med could bring their claims together in Puerto Rico because Mercado’s relationship with Insulet had evolved into the Meta Med relationship with Insulet, and Meta Med’s agreement with Insulet did not mandate Massachusetts as forum. Further, Mercado reasoned that litigating Mercado and Meta Med’s claims against Insulet in different forums would be “impractical, cumbersome, and illogical.” Therefore, the Court should not have enforced the mandatory forum selection clause.

To determine that a mandatory forum selection clause is unenforceable, Mercado had the burden of proving the clause was unreasonable, unfair, secured by fraud, or against public policy. Mercado alleged she met this burden because there was an imbalance of power between her and Insulet, she could not negotiate the agreement terms, it was inconvenient to litigate in two courts, and Puerto Rico must be the forum to protect the Law 75’s public policy objectives.

The Court rejected Mercado’s allegations. First, the Court noted that a mere imbalance of power or a contract of adhesion (i.e., a contract which is drafted by the party with superior bargaining power leaving the weaker party no room to negotiate terms) is insufficient to render the clause unenforceable. Similarly, the clause was not unenforceable just because Massachusetts was potentially an inconvenient forum. Mercado knew of the potential inconvenience of litigating in Massachusetts at the time of contracting. Lastly, the Court held that Law 75’s public policy goals did not require litigating in Puerto Rico because a Massachusetts court could consider the Law 75 claims just as well. Accordingly, the Court held that the clause was enforceable, and Massachusetts was the proper forum. Therefore, the Court granted Insulet’s motion to dismiss without prejudice.

Insulet’s Partial Motion to Dismiss Meta Med’s Claims Granted with Prejudice

Meta Med sued Insulet based on events before Meta Med and Insulet entered into the distribution agreement. Meta Med argued its relationship with Insulet was a continuous and ongoing extension of Mercado’s relationship with Insulet. However, the Court found Meta Med and Mercado to be two different parties with two separate agreements with Insulet. Because Meta Med did not enter an agreement with Insulet until September 1, 2022, the Court held that Meta Med could not bring any claims arising from events before the agreement was signed. As a result, Insulet’s motion for partial dismissal of Meta Med’s claims was granted.

Mercado and Meta Med Law 21’s Claims

The Court granted Insulet, GEMCO, and DDP’s Motion to Dismiss Mercado and Meta Med’s Claims

Like Law 75, the Puerto Rico Sales Representative Act or “Law 21” protects sales representatives against a manufacturer’s arbitrary termination.

Mercado and Meta Med argued that their relationships with Insulet, GEMCO, and DDP were protected by Law 21 because all the parties intended for Mercado and Meta Med to be sales representatives of Insulet products. However, the Court quickly dismissed these claims because Law 21 only applies to exclusive sales representatives. The Court found that Mercado and Meta Med admitted their relationships with Insulet, GEMCO, and DDP were not exclusive and that Insulet had other distributors in Puerto Rico. Consequently, the Court dismissed the Law 21 claim against Insulet, GEMCO, and DDP with prejudice.

While Puerto Rico Law 75 and 21 provide strong protections to distributors, there are limits on claims to recover damages incurred from termination of a distribution arrangement. Regardless of who the distributor purchases the products from, liability is limited to the principal or manufacturer and does not extend down the distribution line to intermediate parties. Additionally, bringing a cause of action under Law 75 will not supersede a bargained-for choice of venue. Therefore, manufacturers and distributors can agree to forum selection clauses outside Puerto Rico with confidence of their enforceability.

Special thanks to Kellie Maguinness, a summer associate in Foley’s Dallas office, for her contributions to this article.

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