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

The Distribution Agreements and Their Termination

Following the formation of manufacturer-distributor relationships with both Mercado and Meta Med, Insulet engaged wholesale distributors GEMCO Medical and DDP Medical Supply to resell its products to Mercado and Meta Med. However, Insulet later terminated the distributorships, triggering complex litigation with multiple claims.

Distributors Make Claims Under Law 75 and Law 21

Mercado and Meta Med asserted that their relationships with Insulet, GEMCO, and DDP were protected under Puerto Rican Law 75 and, alternatively, Puerto Rican Law 21, leading to three causes of action and a request for a declaratory judgment. Insulet, GEMCO, and DDP responded by filing motions to dismiss the claims.

What is Law 75?

Law 75 regulates relationships between distributors and manufacturers, aiming to provide  protection form arbitrary termination of distribution agreements. Mercado and Meta Med argued that GEMCO and DDP were integral to their relationship with Insulet and should be considered “principals” under Law 75. The court, however, disagreed, concluding that GEMCO and DDP were not manufacturers, and therefore, Law 75 did not apply. This resulted in the dismissal of the first cause of action against GEMCO and DDP with prejudice.

Manufacturer’s Motions to Dismiss Distributor’s Claims

The court dismissed Mercado’s claims against Insulet due to an improper forum. The agreement between Mercado and Insulet specified Massachusetts as the mandatory forum for all related claims. Mercado contended that the evolving relationship with Insulet should allow her and Meta Med to file claims in Puerto Rico. The court, however, upheld the forum selection clause, finding no grounds to deem it unenforceable. Consequently, Insulet’s motion to dismiss was granted without prejudice.

Meta Med sued Insulet based on pre-agreement events, arguing one, continuous relationship existed with Mercado. The court determined that Meta Med and Mercado were distinct entities with their own separate agreements with Insulet. Therefore, Meta Med’s claims arising from events before its own agreement with Insulet were dismissed with prejudice.

What Is Law 21?

Similar to Law 75, Puerto Rico Law 21 protects exclusive sales representatives from arbitrary termination by manufacturers. Mercado and Meta Med argued that their manufacturer-distributor relationship was protected under Law 21. However, the court found that their agreements were not exclusive, leading to the dismissal of Law 21 claims against Insulet, GEMCO, and DDP with prejudice.

Key Takeaways: There Are Limits to the Protections of Law 75 and Law 21

The case underscores the limitations of claims under Puerto Rican Law 75 and Law 21 for distributors seeking to recover damages from terminated agreements. Liability remains confined to manufacturers, not extending to intermediaries. Additionally, the enforceability of forum selection clauses outside Puerto Rico is affirmed, providing clarity for manufacturers and distributors.

This analysis highlights critical aspects of distribution agreements and the legal protections available to distributors. Understanding these nuances is essential for navigating and structuring effective distribution and franchise agreements. By incorporating these insights, stakeholders in the franchise and distribution sectors can better safeguard their interests and ensure compliance with relevant legal frameworks.

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