United States Court of Appeals For the First Circuit

No. 22-1491

JOSÉ SANTIAGO, INC.,

Plaintiff, Appellant,

v.

SMITHFIELD PACKAGED MEATS CORP.,

Defendant, Appellee,

SMITHFIELD FOODS, INC.,

Defendant.

APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF PUERTO RICO

[Hon. Silvia Carreño-Coll, U.S. District Judge]

Before

Kayatta, Howard, and Thompson, Circuit Judges.

Alfredo Fernández-Martínez, with whom Carlos R. Baralt-Suárez and Delgado Fernández LLC were on brief, for appellant. Ryan David Frei, with whom Garrett Hansbrough Hooe, McGuireWoods LLP, Henry O. Freese‐Souffront, Daniel Pérez‐Refojos, and McConnell Valdés LLC were on brief, for appellee.

April 25, 2023 KAYATTA, Circuit Judge. Puerto Rico's Law 75 governs

the relationships between distributors in Puerto Rico and their

suppliers. José Santiago, Inc. ("JSI"), is a distributor of food-

service products in Puerto Rico. It contends that one of its

suppliers violated Law 75 by refusing to continue filling JSI's

orders unless JSI agreed to a written distribution agreement that

would limit the products it could order. JSI filed a motion for

a preliminary injunction under Law 75, which the district court

denied. Although we disagree with some of the district court's

reasoning, we uphold its ultimate conclusion that a preliminary

injunction is not warranted here. Of course, any conclusions

bearing on the merits contained in this opinion should be

understood as nothing more than "statements as to probable

outcomes." Wine & Spirits Retailers, Inc. v. Rhode Island,

(1st Cir. 2007) (quoting Cohen v. Brown Univ.,

(1st Cir. 1996)). The parties will have opportunities to

present further evidence and renew arguments as the case

progresses. Re-Ace, Inc. v. Wheeled Coach Indus., Inc.,

(1st Cir. 2004); Luis Rosario, Inc. v. Amana Refrigeration,

Inc.,

(1st Cir. 1984).

I.

JSI is the largest food-service distributor in Puerto

Rico. It receives food-service products directly from

manufacturers and producers and delivers them to restaurants,

- 2 - hotels, and other enterprises that serve food in Puerto Rico. In

2021, JSI's estimated annual volume of business was about

$300 million.

In 1995, JSI became the exclusive distributor for

Farmland Foods, Inc. ("Farmland"), food-service products in Puerto

Rico. Farmland produced packaged meat products to be used in the

food-service industry. A letter dated October 10, 1995, from

Farmland to JSI confirmed JSI's status as exclusive distributor.

In 2003, Farmland was acquired by Smithfield Foods,

Inc., which sold similar lines of meat products under a variety of

different brands. In 2014, Farmland merged with another Smithfield

entity, with the surviving company named Smithfield Farmland,

Corp. Smithfield Farmland was then merged into Smithfield Packaged

Meats Corp. in 2017. We refer collectively to the various

Smithfield entities involved in this case as "Smithfield."

Although Farmland no longer existed as a company after

2014, for some time Smithfield continued to sell products under

the Farmland brand, alongside its other brands. And while

Smithfield and JSI had no written agreement, Smithfield recognized

JSI's status as the exclusive distributor for Farmland-branded

products until February 2021. Some of Smithfield's other brands

were distributed in Puerto Rico by Ballester Hermanos, Inc.

("Ballester"), at the same time that JSI was distributing Farmland-

- 3 - branded products.1 At least some of the products distributed by

Ballester were the same as products distributed by JSI, just under

different branding.

The method by which JSI distributed the products

remained the same throughout the years. JSI ordered products by

sending a purchase order to Smithfield. The purchase orders

identified the products JSI wanted to order, the relevant

quantities, and JSI's understanding of the prices. They also

stated that payment was due twenty-four days after Smithfield sent

JSI an invoice. And they contained an instruction that read, "If

you do not agree with prices, terms, qtys, freight and pack sizes

in this [purchase order], do not process order until buyer sends

you a new [purchase order]."

To fill a purchase order, Smithfield sent the products

to JSI's authorized agent in Florida, where JSI took title to the

products and assumed all risk. The products then traveled by ocean

freighter to Puerto Rico, where JSI picked them up in its trucks,

stored them in its facilities, and delivered them to its clients.

On occasion, Smithfield was unable to fill JSI's orders due to

shortages of inventory caused by production capacity issues.

1 The record does not reveal when Ballester began distributing Smithfield's other brands in Puerto Rico or whether Ballester's distribution of these brands was exclusive.

- 4 - In 2019, Smithfield embarked on what it describes as a

"global SKU rationalization process," with the goal of

consolidating and reducing the number of brands and redundant

products that it sold. Smithfield later accelerated this

consolidation due to production issues caused by the COVID-19

pandemic. In October 2019, Smithfield met with JSI to discuss its

planned consolidation. Smithfield informed JSI that JSI would

continue to be the exclusive distributor for Farmland-branded

products in Puerto Rico. JSI insists that Smithfield said that

JSI would be the exclusive distributor for any Smithfield products

resulting from the consolidation of the Farmland brand. Smithfield

maintains that it made clear that JSI would be the exclusive

distributor for Farmland products only as long as those products

were branded as such, and that it did not promise JSI exclusive

rights to the consolidated Smithfield brand.

On May 18, 2020, Smithfield sent its distributors a

letter providing notice that a number of its brands -- including

Farmland -- would be consolidated into the Smithfield brand. It

stated that "the same great products you have come to expect under

a variety of names will be consolidated into just a few." JSI

requested clarification, and at a meeting Smithfield informed JSI

that it intended for both JSI and Ballester to distribute

Smithfield-branded products. This prompted JSI, in June 2020, to

send a cease-and-desist letter to Smithfield asserting that

- 5 - selling products previously distributed by JSI to another

distributor would violate Puerto Rico's Law 75, which forbids

suppliers from impairing their relationships with their

distributors in Puerto Rico without just cause.

Smithfield responded to JSI's letter in July 2020. It

clarified its position that JSI would remain the exclusive

distributor for Farmland-branded products until the brand was

withdrawn, but that JSI would not acquire exclusive distribution

rights for Smithfield-branded products. It offered JSI a non-

exclusive distribution contract for the Smithfield brand in Puerto

Rico, noting that it made the same offer to another distributor.

JSI refused, contending that it had exclusive distribution rights.

In December 2020, Smithfield sent JSI a notice that the

exclusive distribution relationship for Farmland products would

terminate on February 1, 2021, when the Farmland products would be

consolidated into the Smithfield brand.

Between February 2021 and May 2022, Smithfield continued

to fill JSI's purchase orders. JSI ordered -- and Smithfield

filled orders for -- about forty types of products during this

time period, although the purchase orders themselves fluctuated

with respect to products and volumes. It appears from the record

that the products that JSI distributed after February 1, 2021,

were, in substance, identical or near-identical to the products it

- 6 - distributed beforehand -- the only material difference being the

branding that appeared on the packaging.

In October 2021, with JSI still refusing to agree to a

non-exclusive distribution contract for Smithfield products,

Smithfield entered into an exclusive distribution contract for

certain products in Puerto Rico with Ballester. That contract

encompassed many of the products that Smithfield continued to sell

to JSI, but it carved out seven products that Smithfield calculated

made up the bulk of JSI's purchase volume by weight.2 Despite the

exclusive contract with Ballester, Smithfield for a while

continued filling JSI's orders for all products, not just the seven

carved-out products.

In February 2022, Smithfield offered an exclusive

distribution contract to JSI for the seven carved-out products.

JSI declined because it wanted to continue distributing all forty

products, rather than limit itself to the seven carved-out

products. Smithfield continued to fill JSI's purchase orders.

In late April 2022, Smithfield began notifying JSI that

it could not fill JSI's orders because JSI had exceeded its credit

limit with Smithfield. Smithfield also sent notices to JSI that

it could not fill orders because certain of JSI's payments were

2 Smithfield calculated that in April 2022, the seven carved- out products made up approximately sixty percent of JSI's purchase volume by weight.

- 7 - past due.3 In a June 2022 declaration, Smithfield claimed JSI had

paid its invoices an average of 8.75 days late over the prior year,

and that those late payments played a role in Smithfield's decision

to enter an exclusive distribution agreement with Ballester. But

the first time Smithfield complained about late payments to JSI

was on May 2, 2022, more than six months after Smithfield entered

into its new agreement with Ballester. Smithfield continued

filling JSI's purchase orders once JSI corrected the credit-limit

and late-payment issues.

On May 4, 2022, Smithfield sent JSI an email renewing

its February offer to give JSI exclusive distribution rights for

the seven carved-out products and stating that if JSI did not

accept, JSI must inform Smithfield by May 31, 2022, whether it

would agree to be a non-exclusive distributor in Puerto Rico for

those products. The email made clear that, in either case, the

terms would be formalized in a written contract. It stated that

Smithfield would "temporarily" receive JSI's orders until May 31,

2022. JSI understood this to mean that Smithfield would not fill

JSI's orders after this date unless JSI agreed to a written

distribution contract for the seven carved-out products. The

deadline was later extended to June 15, 2022.

3 These were two separate issues; because JSI had twenty- four days to complete payment, it was possible for JSI to be over its credit limit while still being current on payment.

- 8 - JSI did not accept Smithfield's offers, instead opting

to file suit against Smithfield in the U.S. District Court for the

District of Puerto Rico. Among other allegations, JSI contends

that Smithfield violated Law 75, first by revoking JSI's status as

exclusive distributor and selling the same products to another

distributor in Puerto Rico, and then by conditioning the filling

of JSI's orders on JSI's agreement to limit those orders to the

seven carved-out products. JSI moved for a preliminary injunction

under Law 75 to preserve the status quo -- i.e., Smithfield's

filling of JSI's orders for all forty products on a non-exclusive

basis -- while the case was litigated. It contends that absent an

injunction, JSI would have to establish relationships with new

suppliers and would lose its reputation as a reliable source of

products. In 2021, JSI's annual sales of Farmland and Smithfield

products totaled about $13 million.

The district court denied JSI's motion for a preliminary

injunction. JSI timely appealed. We have jurisdiction under

(a)(1).

II.

Puerto Rico's Law 75 "'governs the business relationship

between principals and the locally appointed distributors that

market their products.' The statute was enacted to avoid 'the

inequity of arbitrary termination of distribution relationships

once the designated dealer had successfully developed a local

- 9 - market for the principal's products and/or services.'" Medina &

Medina Inc. v. Hormel Foods Corp.,

(1st Cir. 2016)

(cleaned up) (quoting Irvine v. Murad Skin Rsch. Lab'ys, Inc.,

(1st Cir. 1999)).

In furtherance of that goal, the statute allows courts

to grant preliminary injunctions "ordering any of the parties, or

both, to continue, in all its terms, the relation established by

the dealer's contract, and/or to abstain from performing any act

or any omission in prejudice thereof." P.R. Laws Ann. tit. 10,

§ 278b-1. In determining whether to grant such a remedy, Law 75

instructs the court to "consider the interests of all parties

concerned and the purposes of the public policy contained in this

chapter." Id. Thus, "[a] preliminary injunction under this

statutory provision 'is not tied to a showing of irreparable injury

or to probability of success in the case on the merits, but rather

to the policies of the Act in promoting the continuation of

dealership agreements and the strict adherence to the provisions

of such agreements.'" Waterproofing Sys., Inc. v. Hydro-Stop,

Inc.,

, 33 (1st Cir. 2006) (quoting DeMoss v. Kelly

Servs., Inc.,

(1st Cir. 1974)). This is the

substantive standard we apply in this diversity case.

"While the statute does not require a finding of

likelihood of success as a prerequisite to issuance of an

injunction, the court's view of the merits would certainly affect

- 10 - its judgment of the weight of the parties' interests and of the

injunction's effect on the statutory policies." Luis Rosario,

(quoting Pan Am. Comput. Corp. v. Data Gen. Corp.,

(1st Cir. 1981)). Indeed, it is hard to see how an

injunction would further the policies of the statute if it

prevented a principal from taking an action that the statute

allows. For that reason, we assess JSI's likelihood of success on

the merits before analyzing, in light of that assessment, the

interests of the parties and the purposes of Law 75.

The district court found JSI unlikely to succeed on the

merits and, due largely to that unlikelihood, it concluded that

the parties' interests and Law 75's public policy weighed against

issuing an injunction. We review this decision for "abuse of

discretion, with conclusions of law reviewed de novo and findings

of fact for clear error." Trafon Grp., Inc. v. Butterball, LLC,

(1st Cir. 2016).

III.

Law 75's protections extend only to "dealers." A

"dealer" is a "[p]erson actually interested in a dealer's contract

because of his having effectively in his charge in Puerto Rico the

distribution, agency, concession or representation of a given

merchandise or service."

(a). In

turn, a "dealer's contract" is a "[r]elationship established

between a dealer and a principal or grantor whereby and

- 11 - irrespectively of the manner in which the parties may call,

characterize or execute such relationship, the former actually and

effectively takes charge of the distribution of a merchandise, or

of the rendering of a service, by concession or franchise, on the

market of Puerto Rico."

(b). A

dealer's contract need not be in writing. Medina & Medina,

n.16 ("Law 75 does not require an agreement to be in

writing for its terms to have legal effect.").

Once a dealer's contract has been established, Law 75

prohibits a principal from "directly or indirectly perform[ing]

any act detrimental to the established relationship or refus[ing]

to renew said contract on its normal expiration, except for just

cause." P.R. Laws Ann. tit. 10, § 278a. The statute presumes

impairment in several circumstances, including "when the principal

or grantor unjustifiably refuses or fails to fill the order for

merchandise sent to him by the dealer in reasonable amounts and

within a reasonable time." P.R. Laws Ann. tit. 10, § 278a-1(b)(3).

Our case law has clarified that Law 75's protections do

not extend beyond the scope of the parties' contract. We have

said that "the 'established relationship' between dealer and

principal is bounded by the distribution agreement, and therefore

the Act only protects against detriments to contractually acquired

rights." Vulcan Tools of P.R. v. Makita USA, Inc.,

(1st Cir. 1994). "The protection afforded distributors under

- 12 - Law 75 . . . is 'circumscribed by those rights acquired under the

agreement regulating their business relationship.' Thus, 'whether

or not an impairment has taken place will depend upon the specific

terms of the distribution contract.'" Medina & Medina,

(citations omitted) (quoting Irvine,

). Said

differently, "[t]he 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,

.

That being said, Law 75 allows principals to impair the

established relationship only if they can show they had "just

cause" to do so. P.R. Laws Ann. tit. 10, § 278a; see R.W. Int'l

Corp. v. Welch Foods, Inc.,

(1st Cir. 1996)

(Welch II) ("[O]nce a dealer demonstrates that its principal

unilaterally terminated their contract, the principal must carry

the burden of persuasion on the factual elements of the 'just

cause' showing."). "Just cause" is defined in the statute as

"[n]onperformance of any of the essential obligations of the

dealer's contract, on the part of the dealer, or any action or

omission on his part that adversely and substantially affects the

interests of the principal or grantor in promoting the marketing

or distribution of the merchandise or service."

(d). Of course, just as the parties' agreement may

- 13 - circumscribe the extent of the dealer's rights, so too the

agreement, by allowing certain conduct or inaction by the dealer,

may circumscribe the ability of the principal to deem such conduct

or inaction just cause.

To summarize, to prove a violation of Law 75, a party

must show that it is a dealer (with a dealer's contract), and

that the principal refused to renew or impaired the terms of the

existing contract between the parties. Once this has been shown,

the principal may avoid liability by proving that it had just cause

for its nonrenewal or impairment of the contract.

A.

The district court found JSI to be a dealer based on the

following facts:

JSI promotes Farmland and Smithfield products, keeps an inventory of them in its warehouses, fixes the price at which it sells them, delivers them to its clients, bills its clients, extends credit to its clients, has a Foodservice Sales Marketing Program agreement with Smithfield where Smithfield reimburses it a small sum for advertising costs, assumes the risk before the products enter Puerto Rico, purchases the products from Smithfield, and maintains its own facilities. Needless to say, JSI has total control over the products' distribution in Puerto Rico.

José Santiago Inc. v. Smithfield Foods, Inc., No. 22-1239,

, at *4 (D.P.R. June 15, 2022). Smithfield does not contest

the district court's finding that JSI is a dealer, and we therefore

assume it to be so.

- 14 - Smithfield does argue, however, that JSI did not have a

"dealer's contract." The district court assumed that a non-

exclusive distribution contract existed between the parties,

although it noted its skepticism that such a contract existed.

See

("JSI has not accepted any offer to form one and the

inconsistency in the parties' dealings make it more likely that

each product purchase constitutes a contract."). Smithfield

argues that JSI consistently rejected Smithfield's offers for a

non-exclusive distribution contract and the parties never accepted

master terms governing their relationship. Therefore, Smithfield

contends, "the parties effectively dealt on a purchase order-by-

purchase order basis."

Smithfield does not explain how JSI could be a dealer

without a dealer's contract, given that the statutory definition

of "dealer" requires that a dealer be "actually interested in a

dealer's contract."

(a). Moreover,

the statutory criteria for being a dealer and having a dealer's

contract are essentially identical: One would be hard pressed to

come up with a scenario in which an actor has "effectively in his

charge in Puerto Rico the distribution, agency, concession or

representation of a given merchandise or service" but is not part

of a relationship in which that actor "actually and effectively

takes charge of the distribution of a merchandise, or of the

rendering of a service, by concession or franchise, on the market

- 15 - of Puerto Rico."

(a)–(b). And

Smithfield does not point us to any such scenario. So the same

facts that establish JSI's status as a dealer give rise to a

relationship constituting a dealer's contract.

More fundamentally, Smithfield's argument premised on

the absence of a formal offer and acceptance fails because Law 75

recognizes a dealer's contract "irrespectively of the manner in

which the parties may call, characterize or execute such

relationship."

(b). The dealership

relationship here was not established through a formal offer and

acceptance, but rather through the parties' course of dealing

described above that led to "JSI [having] total control over the

products' distribution in Puerto Rico." José Santiago,

, at *4; see R.W. Int'l Corp. v. Welch Food, Inc.,

, 482–83 (1st Cir. 1994) (Welch I) (holding that Law 75 applied

where plaintiff had been performing functions of a dealer, even

though parties had not agreed on essential terms).

Nor does JSI's refusal to sign a written non-exclusive

distribution agreement negate the relationship established by the

parties' conduct, as Smithfield argues. JSI declined Smithfield's

offer of a written non-exclusive distribution agreement because it

claimed that it was already an exclusive distributor protected by

Law 75. Indeed, in June 2020, JSI sent Smithfield a cease-and-

desist letter taking the position that selling products to another

- 16 - distributor would violate Law 75 by impairing JSI's exclusive

distribution rights. Refusing to consent to a non-exclusive

distribution arrangement because one believes one has exclusive

distribution rights can hardly be construed as renouncing any

distribution relationship whatsoever. See, e.g., Re-Ace,

(affirming preliminary injunction under Law 75 where a

dealer with exclusive distribution rights rejected an offer to

make the agreement non-exclusive).

In sum, we think it likely that JSI is a dealer with a

dealer's contract. We turn next to the terms of that contract.

B.

JSI contends that it had a contractual right to have

Smithfield fill its orders for the approximately forty products

that JSI had been distributing prior to May 2022. Therefore, JSI

argues, Smithfield violated the parties' contract and Law 75 by

conditioning its filling of JSI's orders on JSI's agreement to a

written contract for only the seven carved-out products.

Smithfield argues that no such contractual right

existed. It describes the parties' relationship following

Smithfield's termination of the exclusive distribution agreement

as "purchase order-by-purchase order," such that each of JSI's

purchase orders was an offer that Smithfield was free to accept,

modify, or decline.

- 17 - With no written contract, the law looks to the parties'

"course of dealing to discern the terms of the agreement." Medina

& Medina,

n.15. In so doing, the district court

determined that JSI did not have a contractual right to have

Smithfield fill its orders:

The problem here is that we see no pattern or consistency in the parties' course of dealing. There is no minimum product volume that JSI must purchase. There is no minimum product volume that Smithfield must sell. There are no circumstances under which Smithfield must fill JSI's purchase orders. Indeed, Smithfield can refuse to fill a purchase order if it disagrees with JSI's terms. JSI's product needs cannot be forecasted from Smithfield's sales-tracking software because its purchases vary so greatly. The short of it is that we see no contractually acquired rights at all. For JSI is not obligated to place orders and Smithfield is not obligated to fill them.

José Santiago,

, at *4. The following factual

findings provided the basis for the district court's

determination:

Neither the exclusive distribution contract nor the nonexclusive one has set terms as to product volume, type, or price. And the volumes and types of products that JSI orders have fluctuated greatly. Moreover, JSI's purchase orders state that Smithfield should not process an order if it disagrees with JSI's offered price, quantity, freight, or pack sizes. Smithfield sometimes declines to fill JSI's purchase orders for one reason or another. There have been times, for example, when JSI has reached its credit limit or Smithfield has disagreed with the terms in JSI's purchase orders. The only consistent

- 18 - term has been "NET 24," meaning that payment is due twenty-four days after the invoice date. Paying on time is a part of their relationship.

. Thus, the district court determined that JSI did not

have a right to have its orders filled because JSI's orders

fluctuated with respect to volumes and types of products, and the

purchase orders allowed Smithfield to decline to fill an order if

it disagreed with its terms (which Smithfield did on occasion).

The district court found that the only consistent term was that

JSI had to pay within twenty-four days of the invoice.

We review the district court's factual findings for

clear error. "A finding is clearly erroneous when although there

is evidence to support it, the reviewing court on the entire

evidence is left with the definite and firm conviction that a

mistake has been committed." García Pèrez v. Santaella,

(1st Cir. 2004) (quoting Lundquist v. Precision Valley

Aviation, Inc.,

(1st Cir. 1991)); see Anderson v.

City of Bessemer City,

(1985). Although "[w]e

do not lightly reverse a district court's holding when reviewing

for clear error," United States v. Winston,

(1st

Cir. 2006), we think this case meets the standard.

JSI has a long history of placing orders with Smithfield,

and Smithfield has a long history of filling those orders. This

has occurred since 2003, when Farmland became part of the

- 19 - Smithfield corporate umbrella. As the district court found,

"[w]hen it wants to receive products, JSI sends a purchase order

to Smithfield" and, "[i]f Smithfield approves the order, it sends

the products to JSI's authorized agent in Jacksonville, Florida."

José Santiago,

, at *2. The district court found

that this relationship "has not changed throughout the years,"

which is consistent with testimony from JSI's president that

this aspect of the parties' relationship has not changed. After

Smithfield purported to terminate JSI's exclusive distribution

contract for Farmland products, it continued to fill JSI's orders

in the same way it had done before, and for the same types of

products (albeit in at least some instances under different

branding). Indeed, Smithfield continued selling the same products

to JSI even after Smithfield had entered into an exclusive

distribution agreement with Ballester.

Smithfield claims to have continued filling JSI's orders

since February 2021 only "out of courtesy" and in hopes of

eventually reaching an agreement. But Smithfield points to no

evidence showing that it ever communicated to JSI that it was

filling orders out of courtesy on an order-by-order basis, rather

than as a continuation of the parties' longstanding relationship.

The parties' course of dealing is to be defined by their observable

behavior, rather than any subjective, unexpressed intent that one

of them claims to have had. See, e.g., P.R. Tel. Co. v. SprintCom,

- 20 - Inc.,

(1st Cir. 2011) ("In determining 'the

intention of the contracting parties, attention must principally

be paid to their acts, contemporaneous and subsequent to the

contract.'" (emphasis added) (quoting

)); Nadherny v. Roseland Prop. Co.,

(1st

Cir. 2004) ("The unexpressed intention of one party is not binding

on the other party to a contract."). And the evidence in the

record strongly suggests that Smithfield continued filling JSI's

orders after February 2021 in the exact same manner as it had done

before.

The district court found no pattern or consistency in

the parties' course of dealing because the products and volumes in

JSI's purchase orders have fluctuated. Smithfield submitted

evidence of this fluctuation between February 2021 and May 2022,

which it says reflects the order-by-order nature of the

relationship during this time period. We think this too narrow a

focus. The relevant pattern or consistency is Smithfield's

continued behavior of filling the purchase orders containing

products outside of the seven carved-out products. After all, as

JSI points out, it makes sense that products, volumes, and prices

would vary along with market conditions and consumer demand.

Moreover, Smithfield proffers no evidence showing that the

fluctuation in JSI's orders was new as of February 2021 and that

- 21 - JSI's orders did not always vary in this manner -- even under the

exclusive distribution agreement for Farmland products.

The district court also placed much weight on the

purchase orders' statements that Smithfield could decline to fill

an order if it disagreed with certain terms. But the language

instructing Smithfield to "not process order until buyer sends you

a new [purchase order]" did not allow Smithfield to decline to

fill an order at its pleasure. Rather, if the information in the

purchase order was inaccurate, or if Smithfield was unable to fill

the order, it directed Smithfield to hold off on processing the

order until JSI sent a new one that was accurate and fillable.

This is perfectly consistent with an expectation that Smithfield

would fill JSI's orders so long as they were accurate and

Smithfield was able to do so. Moreover, that same language

appeared in the purchase orders JSI sent to Smithfield before

February 2021. Smithfield would have a hard time convincing a

trier of fact that the same words meant two different things at

two different times.

In addition, when Smithfield occasionally did not fill

JSI's orders, it was either because Smithfield had a shortage of

inventory due to production capacity issues or because JSI had

exceeded its credit limit or was behind on payments. In the latter

scenario, Smithfield filled the orders once JSI paid. So JSI had

a reasonable expectation, based on Smithfield's outward conduct

- 22 - and the parties' course of dealing, that Smithfield would fill an

order if it was able to do so and JSI was current on payments (at

least until JSI received Smithfield's May 4, 2022, email).

Based on the foregoing, the record leaves no room for

doubt that Smithfield's filling of JSI's orders was part of the

contractual relationship between the parties. The district court

therefore clearly erred in concluding that JSI's right to have

Smithfield fill its orders was not part of the parties'

"established relationship."

C.

The district court also concluded that, even if

Smithfield were obligated to fill JSI's orders, it would have just

cause to impair the contract by refusing to fill them. It found

two independent bases for just cause: JSI's failure to make timely

payments and the parties' bona fide impasse in negotiations. We

address each basis in turn.

1.

"'[P]aying for goods on time normally is one of the

essential obligations of the dealer's contract,' the non-

fulfillment of which can constitute just cause under Law 75.

However, we have recognized an exception in those unusual cases

where 'a supplier does not care about late payments.'"

Waterproofing Sys., 440 F.3d at 29 (quoting PPM Chem. Corp. of

- 23 - P.R. v. Saskatoon Chem., Ltd.,

, 139–40 (1st Cir.

1991)).

The district court concluded that timely payment was

more likely than not an essential term of the parties' contract,

despite Smithfield's history of tolerating late payments:

Smithfield has a history of tolerating late payments, but it recently refused to fill orders until JSI made payments on its overdue invoices. Though there appears to be a genuine factual issue about whether timely payment was an "essential" obligation of their contract, we think it more likely that it is because Smithfield, without objection from JSI, has at times refused to fill JSI's orders until it paid overdue invoices. So Smithfield does care about timely payment. Moreover, JSI said that paying on time is part of their relationship.

José Santiago,

, at *5.

JSI argues that Smithfield's complaints about late

payments were a mere pretext for its impairment of the distribution

relationship. See Waterproofing Sys., 440 F.3d at 29–30 (affirming

grant of preliminary injunction where lower court found that the

"claim of just cause on the basis of late payments was merely

a pretext," despite disagreeing with the lower court's conclusion

that the defendant did not care about late payments).

Smithfield claimed in a declaration in June 2022 that

JSI had paid its invoices an average of 8.75 days late over the

prior year. And Smithfield's senior management evidently knew

about JSI's late payments at least as of October 2021, because its

- 24 - vice president of distributive sales declared that JSI's late

payments played a role in Smithfield's decision to enter an

exclusive distribution agreement with Ballester. But despite

being aware of JSI's late payments, Smithfield never said anything

about late payments to JSI until two days before sending the email

that JSI contends impaired its rights. And once Smithfield

received payment, it resumed filling JSI's purchase orders.

In addition, Smithfield has made abundantly clear during

this litigation -- both before the district court and on

appeal -- that it would prefer to continue its relationship with

JSI, albeit only with respect to the seven carved-out products.

There is at least some tension between Smithfield's desire to

continue doing business with JSI and its suggestion that JSI's

late payments were a "critical issue" that led to Smithfield's

decision to limit JSI's orders to seven items making up

approximately sixty percent of Smithfield's sales volume to JSI by

weight.

JSI's contention that its late payments did not justify

impairing the contract thus has considerable force. Whether it

has enough force to render the district court's finding to the

contrary clear error is a close call. Ultimately, though, it is

not a call we need make. Rather, as we will next explain, we can

affirm based on the district court's second rationale for finding

just cause: a bona fide impasse in negotiations over exclusivity.

- 25 - 2.

The district court found additional just cause for

impairment due to the parties' dispute over exclusivity. Although

JSI's present motion for a preliminary injunction seeks only to

enforce a non-exclusive distribution agreement, at the time the

parties were negotiating JSI demanded exclusivity after

Smithfield's brand consolidation. And our holding above that JSI

continued to be a dealer with a contractual right to have

Smithfield fill its purchase orders has no bearing on whether JSI's

distribution rights were exclusive after the brand consolidation.

For reasons we now explain, we agree with the district court that

the parties' dispute over exclusivity constituted just cause for

Smithfield to impair the distribution relationship.

A strict read of the statutory definition of "just cause"

reveals just two types of actions, both on the part of the dealer,

that give rise to just cause: "[n]onperformance of any of the

essential obligations," and actions that "adversely and

substantially affect[] the interests of the principal."

(d). But "[a]lthough Law 75, by its plain

terms, makes the 'just cause' inquiry turn solely on

the dealer's actions or omissions, the Puerto Rico Supreme Court

has read a 'third' 'just cause' into the statute to avoid

constitutional invalidation, by holding that a principal's own

circumstances may permit its unilateral termination of an ongoing

- 26 - dealership, irrespective of the dealer's conduct." Welch II,

(citation omitted) (citing Medina & Medina v. Country

Pride Foods, Ltd.,

, 822–23 (1st Cir. 1988)); see

V. Suarez & Co. v. Dow Brands, Inc.,

(1st Cir. 2003)

("[A] plain reading of Act 75 would produce, in some situations,

absurd and constitutionally suspect results. As a consequence,

the courts have filled in other readings.").

The foundational case in this area is Medina & Medina v.

Country Pride Foods, Ltd.,4 in which the Supreme Court of Puerto

Rico analyzed a distribution contract of indefinite term with

product prices left open to negotiation.

(reproducing in full the official translation of the court's

decision). The parties periodically set prices by mutual

agreement, and prices fluctuated with changes in the Georgia

market, a recognized industry guideline.

At one point when

the principal demanded higher prices, the parties negotiated in

good faith but failed to reach an agreement.

at 818–19. The

principal then withdrew from the Puerto Rico market, and the dealer

sued for terminating the distribution relationship without just

cause.

.

4 This Medina & Medina case, from 1988, is distinct from the 2016 Medina & Medina case cited earlier in this opinion. We will refer to it as "Medina & Medina (1988)."

- 27 - In response to a certified question from this court, the

Supreme Court of Puerto Rico considered whether a principal's

withdrawal from the Puerto Rico market in light of a bona fide

impasse in negotiations with its dealer could constitute "just

cause" under Law 75.

The court observed that it "would raise

serious constitutional objections" if Law 75 "turn[ed] dealerships

into interminable relationships," such that principals "would be

subjected to live in perpetual symbiosis with the distributors

under all types of circumstances."

at 822–23. Acknowledging

that "the lawmaker's foresight is not always absolute" and that

"on occasions this Court has had to put some contents into the

statute," the court looked to the purposes of Law 75 to overcome

this potential constitutional hurdle.

at 821–23. It observed

that "[t]he principal-dealer relationship is one of collaboration

in the distribution and sale of a product" and that the parties

"are not connected by any dependency agreement or relationship

subordinating one enterprise to the other."

. In light

of that relationship, the court stated:

We cannot possibly construe the statute in such a way that the dealer would govern -- by imposing his conditions -- the principal's sales policies, or vice[ ]versa, with the inevitable loss of the financial and legal autonomy of both. Such interpretation would be contrary to public order because it would place an unreasonable restriction on man's free will.

. Accordingly, the court held that Law 75

- 28 - does not bar the principal from totally withdrawing from the Puerto Rican market when his action is not aimed at reaping the good will or clientele established by the dealer, and when such withdrawal -- which constitutes just cause for terminating the relationship -- is due to the fact that the parties have bargained in good faith but have not been able to reach an agreement as to price, credit, or some other essential element of the dealership.

. The court went on to state that such a termination

"must be preceded by a previous notice term which shall depend on

the nature of the franchise, the characteristics of the dealer,

and the nature of the pre-termination negotiations."

Subsequent decisions of the Supreme Court of Puerto Rico

and this court have clarified and expanded the holding of Medina

& Medina (1988) to continue making just cause under Law 75 a

workable concept. In Borg Warner International Corp. v. Quasar

Co.,

(P.R. 1995), the Supreme Court of Puerto Rico

clarified that proposed changes in contractual terms motivated by

the principal's business circumstances may lead to an impasse

constituting just cause, where such proposed changes are

reasonable and made in good faith. There, a drop in the sale of

products led to a corporate reorganization by the principal's

parent company. Borg Warner, Official Translation at 2–3. As a

result, the dealer's source of products shifted from the original

principal to an affiliated company, and this shift came with

various changes to the terms of distribution. Id. at 3, 14. The

- 29 - dealer objected and, after negotiations between the dealer and the

affiliate broke down, the principal withdrew from the Puerto Rico

market. Id. at 7. The court held that the principal had just

cause to terminate the relationship because the proposed changes

in corporate structure and the terms of distribution were

reasonable and made in good faith. Id. at 10–17, 24. In so

holding, the court emphasized that the purpose of Law 75 requires

that a supplier have "the necessary leeway . . . to organize and

reorganize his distribution chain efficiently and economically."

Id. at 24. Law 75, the court stated, "cannot serve as a

straitjacket, restricting . . . every move the principal makes

without taking into consideration justifiable situations." Id.

We later held that a principal's business circumstances

may justify termination even where no negotiation between the

parties has occurred. In V. Suarez, the principal terminated the

distribution relationship because it sold the product lines being

distributed to another company, which did not agree to assume the

distribution agreement.

. Due to confidentiality

obligations, the principal did not inform the dealer of this sale

until it had already occurred, so there was no opportunity for

negotiation (nor were there any terms to negotiate).

We held

that the principal's termination of the product line constituted

just cause for terminating the relationship.

. We

- 30 - rejected the dealer's argument that good-faith negotiation was a

prerequisite for just cause under these circumstances, stating:

Here, either negotiation would be meaningless or the plaintiff dealer would acquire leverage it would not otherwise possess. This latter effect would create a new imbalance of power, making the entirely legitimate and unrelated corporate interests of the principal in divesting itself of a product line subject to the interests of dealers. To read the Act to require such a result could discourage national and multinational companies from entering into distributorship agreements subject to Act 75 in Puerto Rico.

. Requiring the principal to negotiate with the dealer

before engaging in its legitimate and unrelated business decision,

we reasoned, "would be directly contrary to two stated purposes of

the statute: encouraging a level playing field and not creating

new power in the dealer."

.

The notice requirement from Medina & Medina (1988) has

also been limited. See V. Suarez,

(no notice

required where "there was little reliance by [the dealer] on this

line of business, and there was little [the dealer] could have

done to prepare for this termination had it received advance

notice"); Borg Warner, Official Translation at 18–19 (no notice

required where dealer was the one who refused to purchase products

and practically forced the principal to withdraw from the market).

Finally, we have held that the principal need not leave

the Puerto Rico market, and can instead engage a new dealer, as

- 31 - long as the principal's action "is not aimed at reaping the good

will or clientele established by the dealer." Welch I,

n.4 (quoting Medina & Medina (1988),

); see

Welch II, 88 F.3d at 53–54.

These cases collectively suggest a flexible approach to

just cause under Law 75.5 See, e.g., Welch I,

("Law 75 simply requires a supplier to justify its decision to

terminate a dealership."). This approach fits with the purposes

of Law 75 identified in the case law, i.e., leveling the playing

5 The approach to Law 75's "just cause" provision in Medina & Medina (1988) and the line of cases just described is in stark contrast to the Supreme Court of Puerto Rico's earlier approach in Warner Lambert Co. (Am. Chicle Co. Div.) v. Superior Ct. of P.R.,

(1973), where the court stated:

It should be noted that the just cause is limited to acts imputable to the dealer. Only when the dealer fails to comply with any of the essential conditions or adversely affects in a substantial manner the interest of the principal, may the latter terminate the contract without payment for damages. The Act does not admit the good faith of the principal in the termination of the contract, nor his right to establish his own distribution system or to make adjustments in the system which in good faith he considers necessary to improve his market.

. We adhere to the more recent approach in Medina & Medina (1988) and subsequent decisions from the Supreme Court of Puerto Rico and this court. See Salvador Antonetti Zequeira, A Different Opinion About "Just Cause", 58 Rev. Jur. U. P.R. 625, 628-29 (1989) (describing the court's shift from the "literal reading" of Warner Lambert to the "more flexible approach" in later cases).

- 32 - field between suppliers and dealers and ensuring that suppliers do

not arbitrarily impair existing distribution relationships, while

at the same time avoiding the subordination of one enterprise to

the other and the creation of new power in dealers over suppliers'

legitimate business decisions. See Medina & Medina (1988), 858

F.2d at 820–23; Borg Warner, Official Translation at 24; V. Suarez,

337 F.3d at 7–8.

With this in mind, we turn to the matter at hand in this

case. The district court found that Smithfield had just cause to

impair the parties' distribution contract because JSI's refusal to

accept a written, non-exclusive distribution contract constituted

a bona fide impasse in negotiations. José Santiago,

, at *5. It found that "[t]he parties' core dispute

concerns brand exclusivity."

And it found "no evidence that

Smithfield's decisions to consolidate its brands, do away with

Farmland, and offer JSI a written, nonexclusive distribution

contract [were] unreasonable or in bad faith."

JSI contends this was error for two reasons. First, JSI

argues that its refusal to accept a written contract with terms

more detrimental than its existing distribution

relationship -- i.e., seven products instead of forty -- cannot

possibly constitute just cause for impairing that relationship.

Second, JSI argues that Smithfield's actions were aimed at reaping

the goodwill and clientele established by JSI because Smithfield

- 33 - essentially handed to Ballester all of JSI's work promoting

Farmland and then Smithfield products in Puerto Rico.

JSI's first objection takes too narrow a focus. The

core impasse that the district court found constituted just cause

was not JSI's refusal to accept seven products instead of forty,

but rather the parties' unresolved dispute over exclusivity after

Smithfield's brand consolidation. That dispute arose because

Smithfield embarked on a national consolidation of brands to

eliminate redundancies in its product lines, which meant that the

Farmland brand that JSI had been distributing exclusively would be

merged with other brands distributed by other distributors

(including Ballester in Puerto Rico). The resulting consolidated

brands would then be distributed by both JSI and Ballester. JSI

claimed this was a breach of its exclusivity rights and a violation

of Law 75 and refused to sign a written, non-exclusive distribution

agreement. After trying and failing for months to get JSI to agree

to a written, non-exclusive contract, Smithfield inked an

exclusive deal with Ballester, carving out for the benefit of JSI

seven products that made up a substantial portion of JSI's order

volume by weight. This exclusive relationship with Ballester is

the apparent reason for Smithfield's decision to limit JSI to the

seven carved-out products.

We find no error in the district court's findings that

Smithfield acted reasonably and in good faith, especially given

- 34 - the presumption of good faith that exists in Puerto Rico law. See

Welch II,

; Borg Warner, Official Translation at

10 n.8. Smithfield's business decision to increase efficiency by

consolidating its brands was reasonable in light of its product

redundancy, particularly considering the production issues that

Smithfield faced during the pandemic. This business decision was

national in scope -- not limited to Puerto Rico -- and was not

developed with JSI in mind. See V. Suarez,

n.11

(giving a dealer power over a principal's legitimate business

decisions "is even harder to justify where the plaintiff dealer

plays a rather minimal role in the principal's overall distributor

network"). Smithfield then found itself with two dealers in Puerto

Rico distributing separate brands that would be merged in the

consolidation. Smithfield could not grant either dealer exclusive

rights to the consolidated brand without significantly impairing

its agreement with the other. It was therefore reasonable in this

situation to offer each dealer non-exclusive rights to the

consolidated brand, such that each dealer could continue

distributing the same or similar products bearing the consolidated

brand label. The district court found that Smithfield made this

offer in good faith, and JSI points to no evidence that persuades

us otherwise.6

6 JSI does not contend that Smithfield failed to timely notify JSI of its brand consolidation and the resulting termination

- 35 - JSI's refusal to agree to a non-exclusive relationship

and insistence on exclusivity necessarily meant that Smithfield

was not going to end up with multiple distributors for its full

product line, as it had initially hoped. Facing this situation,

Smithfield decided to essentially divide its product line between

its two distributors on an exclusive basis: It granted exclusive

rights to Ballester for the majority of the products, while

reserving for JSI seven products making up a substantial amount of

JSI's purchase volume by weight. Nothing in the record suggests

that this was anything less than a rational way for Smithfield to

resolve the dilemma caused by JSI's resistance to a non-exclusive

contract. And we spot no error with the district court's finding

that, after JSI continually rejected Smithfield's good-faith

attempts at compromise, Smithfield had just cause to impair the

relationship due to a bona fide impasse in negotiations.

To hold otherwise would be to render perfectly legal

corporate and brand consolidations unduly problematic. Here, for

example, two distributors apparently each enjoyed distributing

similar products under different brands (and at least JSI did so

exclusively). Following the brand consolidation, something had to

give: Both distributors could not have conflicting rights over

of JSI's exclusive rights to the Farmland brand. And here Smithfield notified JSI of its upcoming consolidation well before it occurred, and kept JSI up to date throughout the process.

- 36 - the same products. So unless we are to read Law 75 as precluding

good-faith brand consolidations, we must conclude that the law

allowed Smithfield to attempt to reallocate distribution rights in

a manner that acknowledged the interests of both its distributors

and its own legitimate interest in making its products available

in Puerto Rico. Cf. Borg Warner, Official Translation at 23–24.

Nor does JSI persuade us that Smithfield's conduct was

aimed at reaping the goodwill and clientele established by JSI.

JSI argues that it created a successful market for Farmland-branded

products, and then solidified the market for the rebranded

Smithfield products after the consolidation. JSI contends that

Smithfield sought to take advantage of this work while cutting JSI

out of the picture by partnering exclusively with Ballester.

JSI has failed to present evidence sufficient to

establish Smithfield's intent to co-opt JSI's efforts to develop

goodwill and clientele. See, e.g., V. Suarez, 337 F.3d at 6–7

("The district court correctly found that Suarez had not presented

evidence that Dow was attempting to take advantage of or profited

from the good will and clientele Suarez had developed.

Importantly, Suarez does not allege that Dow at any time acted in

bad faith."). As described above, Smithfield granted Ballester

exclusivity only after trying for months to continue its

relationship with JSI on a non-exclusive basis. And even after

signing the exclusive deal with Ballester, Smithfield continued

- 37 - its efforts to work with JSI by offering JSI exclusive rights to

seven carved-out products that constituted a substantial amount of

JSI's orders by weight. Moreover, it appears from the record that

Ballester also played a significant role in developing the market

for the packaged meat products in Puerto Rico, both before the

brand consolidation (for non-Farmland brands under the Smithfield

umbrella) and after (for the consolidated Smithfield brand). So

if Smithfield had acceded to JSI's demand for exclusivity, and

JSI's interpretation of Law 75 were accurate, Smithfield could

well have faced this same lawsuit, only with Ballester as

plaintiff.

In sum, the district court correctly concluded that

Smithfield would likely succeed in showing just cause to impair

its distribution relationship with JSI based on the parties' bona

fide impasse in negotiations as to exclusivity. The district court

therefore did not abuse its discretion in finding that JSI has a

low likelihood of success on the merits.

IV.

As stated above, the plaintiff's likelihood of success

on the merits in a Law 75 action bears heavily on the weight of

the parties' interests and whether an injunction would serve the

purposes of Law 75. Luis Rosario,

. The district

court concluded that the interests of the parties and the purposes

of Law 75 weighed against entering an injunction in this case

- 38 - because the merits strongly favored Smithfield. José Santiago,

, at *6. It also observed that, although JSI would

likely suffer hits to its sales numbers and reputation if

Smithfield stopped filling orders, Smithfield's products

represented only a small percentage of JSI's total sales.

Given our analysis of the merits, we find no legal error

or abuse of discretion sufficient to justify overruling the

district court's balancing of the relevant factors. As we just

described, Smithfield has a strong interest in being free to carry

out its legitimate business decision of consolidating its brands

nationwide. And the purposes of Law 75, as interpreted by the

Supreme Court of Puerto Rico and this court, do not condone JSI's

efforts to obstruct this legitimate business decision by rejecting

Smithfield's reasonable, good-faith attempts at negotiation. See

Medina & Medina (1988), 858 F.2d at 822–23; Borg Warner, Official

Translation at 23–24; Welch II,

; V. Suarez, 337 F.3d

at 7–8.

V.

For the foregoing reasons, we affirm the district

court's denial of JSI's motion for a preliminary injunction.

- 39 -