When a Distributor Claim Doesn’t Hold Up Under Scrutiny
Puerto Rico’s Dealer’s Contract Act — Act No. 75 of June 24, 1964, as amended (10 P.R. Laws Ann. § 278 et seq.) — is one of the most protective distribution statutes in any U.S. jurisdiction. It provides dealers and distributors with powerful remedies against principals who terminate or impair an established distribution relationship without “just cause.” For decades, Act 75 has shaped how manufacturers, suppliers, and franchisors do business in Puerto Rico.
But Act 75’s protections are not unlimited. The statute requires a genuine distribution relationship — not every commercial arrangement qualifies. When a plaintiff cannot establish that it functioned as a true distributor under the statute, Act 75’s formidable protections do not apply. Our firm recently demonstrated this principle in a case that resulted in the plaintiff voluntarily dismissing its entire case with prejudice after we filed a comprehensive motion for summary judgment on behalf of the manufacturer.
The Case: A Multimillion-Dollar Act 75 Claim Against a U.S. Manufacturer
Our client, a U.S.-based manufacturer of power equipment, was sued in the U.S. District Court for the District of Puerto Rico by a local sales company claiming to be its exclusive distributor for the Puerto Rico market. The plaintiff alleged two causes of action: breach of an exclusive distribution contract and unlawful impairment of its distribution rights under Act 75. The combined damages claim ran into the millions, including alleged unpaid commissions and statutory damages for impairment of the distribution relationship.
The plaintiff claimed it had been appointed as the manufacturer’s exclusive distributor, that it had invested significant resources in developing the Puerto Rico market — particularly through a major retail account — and that the manufacturer had impaired its distribution rights by making direct sales within the territory, altering commercial terms, and ultimately ending the relationship without just cause.
Our Defense Strategy: Challenging the Foundation of the Act 75 Claim
We represented the manufacturer from early in the litigation. After extensive discovery, we developed a defense strategy that attacked the foundational premise of the plaintiff’s case: that a genuine Act 75 distribution relationship existed at all.
Our motion for summary judgment presented several independent grounds for dismissal:
No genuine distribution relationship under Act 75. The evidence established that the plaintiff’s commercial activity was limited to servicing a single retail account in Puerto Rico. The plaintiff performed no independent promotion, advertising, or market development of the manufacturer’s brand. Under Act 75 jurisprudence, a party that merely serves as a logistics intermediary or order fulfillment tool for a single retailer — without independently developing a market or customer base — does not qualify as a “dealer” entitled to the statute’s protections.
The retail client controlled the relationship. The evidence showed that the major retail account — not the plaintiff — made all critical commercial decisions: which products to carry, in what quantities, under what terms, and when. The plaintiff functioned as a supply-chain intermediary, not an independent distributor exercising commercial judgment and building goodwill in the market.
Online platform sales fell outside Act 75’s territorial scope. A substantial portion of the plaintiff’s damages claim was based on commissions from sales made through a national online retail platform. We demonstrated that these sales were fulfilled and delivered exclusively outside Puerto Rico, placing them outside Act 75’s territorial requirement that the distribution relationship involve goods “distributed or services rendered on the market of Puerto Rico.”
No evidence of damages. The plaintiff’s own records showed that its sales and gross profits from the manufacturer’s products had actually increased year over year. When the retail account stopped carrying the manufacturer’s products, the plaintiff simply pivoted to competing brands and continued its relationship with the same retailer. There were no lost sales, no lost customers, and no quantifiable harm.
Breach of contract claim failed independently. We challenged the existence of the alleged exclusive representation agreement, raised statute of limitations defenses, and demonstrated the absence of any causal connection between the alleged breach and the claimed damages. The plaintiff’s damages theory improperly assumed that every direct sale the manufacturer made in the territory would have been made by the plaintiff — a speculative theory rejected by federal courts in Puerto Rico.
The Result: Voluntary Dismissal With Prejudice
After we filed our motion for summary judgment — supported by an extensive evidentiary record and detailed legal analysis — the case resolved through a negotiated settlement on terms very favorable to the manufacturer. The parties stipulated to a dismissal with prejudice, with each side bearing its own attorneys’ fees, costs, and expenses. The case was closed by judgment of the court.
The outcome reflects the strength of the defense: a multimillion-dollar claim was resolved without trial and without any finding of liability under Act 75 or for breach of contract.
Key Legal Principles at Work
This case illustrates several important principles for manufacturers and suppliers operating in Puerto Rico:
Act 75 protects distributors, not logistics intermediaries. The statute’s protections attach to parties who have an established relationship involving the “distribution, agency, concession, or representation” of a principal’s products. A company that merely fulfills purchase orders for a single retail client, without independently promoting or developing the brand in the market, may not qualify as a protected dealer. The distinction between a true distributor and a supply-chain intermediary is critical under Act 75 and has been addressed in cases such as Casas Office Machines, Inc. v. Mita Copystar America, Inc., 961 F. Supp. 353 (D.P.R. 1997).
Act 75’s territorial scope is limited to Puerto Rico. The statute applies to goods distributed or services rendered “on the market of Puerto Rico.” Sales fulfilled and delivered outside Puerto Rico — even if transacted through an online platform managed from the island — fall outside the statute’s reach. This is a significant limitation that manufacturers should understand when structuring multi-channel distribution arrangements.
Discovery is the battlefield. Act 75 cases are frequently won or lost during the discovery phase. In this case, the evidence obtained through discovery revealed the true nature of the commercial relationship and demolished the premise that the plaintiff was a genuine distributor. Thorough, well-planned discovery is essential in defending against Act 75 claims.
Damages must be proven, not assumed. Even if an Act 75 relationship existed, the plaintiff must prove actual damages caused by the principal’s conduct. A theory that assumes every sale the manufacturer made would have been made by the distributor is speculative and insufficient. Courts in Puerto Rico have consistently required concrete evidence of lost sales, lost customers, or diminished goodwill — not mathematical projections disconnected from market reality.
Early and comprehensive motion practice can resolve Act 75 cases before trial. A well-supported motion for summary judgment, grounded in the discovery record, can expose the weaknesses in an Act 75 claim and create the conditions for resolution — whether through judicial dismissal or, as here, a voluntary dismissal by the plaintiff.
ESI management and e-discovery strategy are critical in modern Act 75 litigation. Distribution disputes generate enormous volumes of electronically stored information — email communications, sales platform data, order management records, commission tracking, and correspondence with third-party accounts. In this case, managing ESI was a significant part of the litigation. We navigated complex third-party subpoena issues, negotiated protective orders for confidential business data, addressed discovery objections from non-party entities, and ensured that the electronic evidence needed to support our dispositive motion was properly preserved, produced, and authenticated. Effective ESI management allowed us to build the evidentiary record that ultimately compelled resolution on favorable terms.
For Manufacturers and Suppliers: Managing Act 75 Risk in Puerto Rico
Act 75 creates significant exposure for manufacturers, suppliers, and franchisors doing business in Puerto Rico. The statute’s broad definition of “dealer,” its “just cause” termination requirement, and its mandatory damages provisions (including lost profits, goodwill, and attorneys’ fees) make it a powerful tool for distributors — and a significant risk for principals who do not structure their relationships carefully.
But the statute is not a blank check. Manufacturers have viable defenses, including challenging whether a true distribution relationship exists, demonstrating just cause for termination, contesting the territorial scope of the relationship, and exposing the absence of provable damages. Success requires counsel with deep experience in Act 75 litigation and the ability to develop a factual record that supports the defense.
About Our Practice
Mellado & Mellado-Villarreal represents manufacturers, suppliers, franchisors, and distributors in Act 75 and distribution law disputes in Puerto Rico. Our practice encompasses defense of Act 75 claims on behalf of manufacturers and principals, counseling on distribution agreements and dealer relationships in Puerto Rico, federal court litigation in the U.S. District Court for the District of Puerto Rico, electronically stored information (ESI) management and e-discovery strategy in complex commercial litigation, discovery strategy and summary judgment practice in complex commercial disputes, and appellate advocacy in the First Circuit Court of Appeals.
Whether you are a manufacturer facing an Act 75 claim, a supplier seeking to restructure your distribution arrangements in Puerto Rico, or a distributor whose rights have been impaired, we have the experience and the litigation capability to protect your interests.
Contact us: 787-767-2600 | jmellado@mellado.com | 165 Ponce de León Ave., Suite 102, San Juan, PR 00917
This article is for informational purposes only and does not constitute legal advice. Prior results do not guarantee a similar outcome.
