Regulation of the distribution relationship

Competing products

Are restrictions on the distribution of competing products in distribution agreements enforceable, either during the term of the relationship or afterwards?

Clauses that restrict the distribution of competing products during the term of the relationship are enforceable in distribution agreements. After the relationship concludes, those competition restrictions will be enforceable if the court determines that they are reasonably necessary to protect the legitimate interests of the supplier. The determination will be made on a case-by-case basis. Courts have found that a non-competition clause that survived the termination or expiry of a franchise agreement for two years was enforceable (Franquicias Martín’s BBQ, Inc v Luis García de Gracia, 178 DPR 978 [2010]).

Prices

May a supplier control the prices at which its distribution partner resells its products? If not, how are these restrictions enforced?

Federal antitrust law applies in Puerto Rico. Puerto Rico has its own competition statutes that generally mirror those in the United States both in language and interpretation.

In general terms, and under existing US Supreme Court law, a supplier should be able to impose the vertical restraints of maximum resale price maintenance (RPM) and minimum RPM, although the latter continues to be the subject of diverse positions among state enforcement authorities in the continental United States.

Federal and local enforcement of, or opinion on, the prohibition of either forms of RPM is not pervasive in Puerto Rico, unless part of a nationwide US effort that has a high public profile. Therefore, in very general terms, the larger the company and the more widespread its reach is around the world, the higher the possibility that institutional or governmental involvement may occur to scrutinise its pricing structure or mechanisms.

May a supplier influence resale prices in other ways, such as suggesting resale prices, establishing a minimum advertised price policy, announcing it will not deal with customers who do not follow its pricing policy, or otherwise?

In general terms, and under existing US Supreme Court law, a supplier should be able to impose the vertical restraints of a maximum and a minimum RPM, although the latter continues to be the subject of diverse positions among state enforcement authorities in the continental United States.

If a supplier wishes to implement the use of a minimum advertised price policy, it is preferable that the policy be in place beforehand so that if the dealer is not in agreement, the supplier may choose not to deal with the dealer or negotiate the matter. Once the policy is agreed with the dealer, the situation may be more difficult to navigate. It is the view of many that if a minimum RPM is to be established, it should be up to the supplier to do so as opposed to the distributor.

The use of other mechanisms of vertical restraint that are not so heavily scrutinised may also achieve the intended pro-competitive purposes with lesser legal exposure risk.

May a distribution contract specify that the supplier’s price to the distributor will be no higher than its lowest price to other customers?

In general terms, and under existing US Supreme Court law, a supplier should be able to impose the vertical restraints of maximum resale price maintenance (RPM) and minimum RPM, although the latter continues to be the subject of diverse positions among state enforcement authorities in the continental United States.

If a supplier wishes to implement the use of a minimum advertised price policy, it is preferable that the policy be in place beforehand so that if the dealer is not in agreement, the supplier may choose not to deal with the dealer or negotiate the matter. Once the policy is agreed with the dealer, the situation may be more difficult to navigate. Also, it is the view of many that if a minimum RPM is to be established, it should be up to the supplier to do so as opposed to the distributor.

A distribution contract may specify that the price to a distributor will be equal to those of other distributors, but the provision should also be included and complied with in contracts with the other distributors to avoid potential price discrimination exposure.

 

 

 

Are there restrictions on a seller’s ability to charge different prices to different customers, based on location, type of customer, quantities purchased, or otherwise?

In general, prices should be the same at the same level, but vertical price restraints are permissible on a case-by-case basis as much depends on the situation of each circumstance. Volume discounts, for example, are common, but they should be made available to all customers on the same level of distribution, unless other factors justify a difference (eg, additional services rendered by one customer versus the others).

A distribution contract may specify that the price to a distributor will be equal to those of other distributors, but the provision should also be included and complied with in contracts with the other distributors to avoid potential price discrimination exposure.

 

Geographic and customer restrictions

May a supplier restrict the geographic areas or categories of customers to which its distribution partner resells? Are exclusive territories permitted? Is there a distinction between active sales efforts and passive sales that are not actively solicited, and how are those terms defined?

These vertical restrictions are generally allowed and ideally should be specified in writing at the time of contracting.

Exclusive territories are permitted, but a supplier may just restrict the geographic areas or categories to which its distribution partner resells, although in smaller countries or markets, enforcement of geographic limits tends to be difficult. The supplier, however, also has the contractual ability to limit the specific market sectors or outlet location areas where the distributor may sell its products. The supplier may also limit within the authorised locations the categories of products to be sold or even the specific products within those categories.

Unless specified by contract, we know of no statutory restrictions related to active as opposed to passive sales efforts.

Online sales

May a supplier restrict or prohibit e-commerce sales by its distribution partners?

A supplier may prohibit or restrict e-commerce sales by a distributor either within or outside the assigned territory. The parties may also agree on reporting obligations and the payment of fees or penalties for breach of the restrictions or prohibitions. These restrictions, prohibitions, fees and penalties should be specified in the contract as an essential obligation for a better likelihood of enforcement.

Restrictions on third parties to which the distributor sells are more difficult to enforce usually owing to the lack of privity. A supplier may attempt to impose these restrictions by demanding that the distributor include them in its contractual provisions with the third-party intermediaries.

Refusal to deal

Under what circumstances may a supplier refuse to deal with particular customers? May a supplier restrict its distributor’s ability to deal with particular customers?

A supplier can adopt its own sales policy in Puerto Rico and, as such, deal only with the customers it chooses. A supplier may also contractually restrict to some extent a distributor’s right to deal with certain customers. There are other laws beyond the scope of this chapter that could prohibit a seller from discriminating against customers for reasons such as age, gender and national origin. Other laws prohibit sales of certain products to sectors of the population (such as minors) owing to the nature of the products.

Competition concerns

Under what circumstances might a distribution or agency agreement be deemed a reportable transaction under merger control rules and require clearance by the competition authority? What standards would be used to evaluate such a transaction?

A distribution or agency agreement may be deemed a reportable transaction under merger control rules if its effect is to substantially reduce competition or create a monopoly. The standards used by the Puerto Rican courts to evaluate such a transaction include that:

  • there is proof that the company (unilaterally or in combination with others) had a specific intent to monopolise the market by controlling prices or lessening competition; and
  • anticompetitive or predatory conduct was carried out to fulfil the intent; or
  • the probability exists that the intent would be realised.

 

Do your jurisdiction’s antitrust or competition laws constrain the relationship between suppliers and their distribution partners in any other ways? How are any such laws enforced and by which agencies? Can private parties bring actions under antitrust or competition laws? What remedies are available?

Distribution relationships in Puerto Rico are governed by US antitrust laws. Some of these laws have counterpart local statutes, such as the Antitrust Act, 10 PR Laws Ann section 257 et seq and the regulations promulgated by the Department of Consumer Affairs (DACO) that relate to unfair or deceptive practices. The Puerto Rico Department of Justice, through its Office of Monopolistic Affairs, is in charge of enforcing local antitrust policies.

These laws and agencies may affect the distribution relationship depending on the circumstances. Price discrimination issues, for example, would be covered by the Robinson Patman Act.

Private parties may bring actions under the Antitrust Act. A plaintiff may recover triple the amount of damages in addition to costs and attorneys’ fees. Actions must be filed within four years of the occurrence of the cause of action.

An injunction may also be filed to prevent losses or damages to the business or property.

Law stated date

Correct as of

Give the date on which the information above is accurate.

February 2020