IRVINE IRG v. MURAD SKIN RESEARCH LABORATORIES INC

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United States Court of Appeals,First Circuit.

Ileana IRVINE, IRG Research Group, Inc., Plaintiffs, Appellees, v. MURAD SKIN RESEARCH LABORATORIES, INC., Defendant, Appellant.

No. 98-1595.

Decided: July 08, 1999

Before TORRUELLA, Chief Judge, SELYA, Circuit Judge, and ACOSTA, *Senior District Judge. Vincent J. Syracuse, with whom Newman Tannenbaum Helpern Syracuse & Hirschtritt LLP, David A. Pellegrino and Luis N. Blanco-Matos were on brief, for appellant. Jossie Yunque-López and Raúl González-Toro, for appellees.

On appeal defendant-appellant Murad Skin Research Laboratories, Inc. (“Murad”) challenges the verdict rendered in favor of both plaintiffs IRG RESEARCH GROUP, INC. (“IRG”) and Ileana Irvine (“Irvine”).   Specifically, Murad alleges that the district court erred by (1) not granting its motion for judgment as a matter of law;  (2) declining to charge the jury in accordance with its proffered instruction on foreseeability;  (3) denying its petition for a new trial;  and (4) allowing the testimony of plaintiffs' expert witness.

On review we agree with Murad's reasoning that both causes of action should have been dismissed as a matter of law.   Accordingly, there is no need to address the other issues raised by Murad.

BACKGROUND

Murad is a stateside manufacturer of skin care products.   Irvine and her daughter, Catherine Irvine Sarnataro, both “aestheticians,” i.e. skin care specialists, first came in contact with the Murad line of products at a trade show in Chicago in 1989.   Irvine testified at trial that there was a “glycolic acid revolution” in the industry at the time and she found the glycolic acid manufactured by Murad to be the “most effective” of all the other products available in the market.   Initially, she purchased Murad products for her own clients but since 1991 she also sold them to various salons.

Subsequently, Irvine and her daughter met periodically with Dr. Howard Murad, president of Murad, at various conferences and conveyed to him an interest in becoming the exclusive distributor of Murad products in Puerto Rico. The conversations culminated in a provisional exclusive distribution agreement dated September 2, 1993 with IRG, a corporation established and controlled by Irvine and her daughter.   The contract would be extended thereafter conditioned upon IRG meeting certain sales quotas.

Both Irvine and her daughter testified regarding their efforts on behalf of IRG to develop a market for the Murad skin products in Puerto Rico which included promotions, advertisements, demonstrations, training and education of both aestheticians and dermatologists.   IRG operated through its own clinics and also sold to aestheticians and medical offices.

In May 1994 Murad broadcast an infomercial on various stateside cable television stations as part of its advertising campaign.   Dr. Murad testified that the purpose behind the infomercial was to expose their home products to customers and also to lure them into the salons for professional treatment.   Unbeknown to Murad, a New York station relayed the infomercial to Puerto Rico and its products were thereby made available locally through telemarketing.

According to plaintiffs-appellees, the infomercial marked the beginning of the economic downfall of both IRG and Irvine.   After IRG learned of the telemarketing incursion, it sought relief under the Puerto Rico Distributorship Act, Law 75 of June 24, 1964, P.R. Laws Ann. tit. 10, § 278 et seq. (199 7) whereas Irvine sued under the local torts statute.   The jury found for plaintiffs-appellees and awarded $390,000 to IRG and $100,000 to Irvine as damages.

RULE 50

Petitions for judgments as a matter of law under Rule 50(a)(1) Fed.R.Civ.P. will be granted only in those instances where, after having examined the evidence as well as all permissible inferences drawn therefrom in the light most favorable to non-movant, the court finds that a reasonable jury could not render a verdict in that party's favor.  Mangla v. Brown Univ., 135 F.3d 80, 82 (1st Cir.1998);  Ed Peters Jewelry Co. v. C & J Jewelry Co., 124 F.3d 252, 261 (1st Cir.1997);  Bogosian v. Mercedes-Benz of N. Am., Inc., 104 F.3d 472, 475 (1st Cir.1997);  Speen v. Crown Clothing Corp., 102 F.3d 625, 628 (1st Cir.1996), cert. denied, 520 U.S. 1276, 117 S.Ct. 2457, 138 L.Ed.2d 214 (1997).   In carrying out this analysis the court may not take into account the credibility of witnesses, resolve evidentiary conflicts, nor ponder the weight of the evidence introduced at trial.  Alvarez-Fonseca v. Pepsi Cola of P.R. Bottling Co., 152 F.3d 17, 23 (1st Cir.1998), cert. denied, 526 U.S. 1123, 119 S.Ct. 1778, 143 L.Ed.2d 806 (1999);  Logue v. Dore, 103 F.3d 1040, 1043 (1st Cir.1997);  Speen, 102 F.3d at 637;  Katz v. City Metal Co., Inc., 87 F.3d 26, 28 (1st Cir.1996).

In order to overcome a Rule 50 petition the party carrying the burden of proof must have introduced at trial sufficiently adequate evidence for the jury to determine the plausibility of a particular fact.  “Thus, in order to support a jury finding on such an issue, the evidence presented must make the existence of the fact to be inferred more probable than its nonexistence.”  Alvarez-Fonseca, 152 F.3d at 24;  Katz, 87 F.3d at 28;  Richmond Steel, Inc. v. Puerto Rican Am. Ins. Co., 954 F.2d 19, 22 (1st Cir.1992);  Malavé-Félix v. Volvo Car Corp., 946 F.2d 967, 971 (1st Cir.1991).

A mere scintilla of evidence will not rise to a triable issue of fact necessary to avoid dismissal under Rule 50.  Crane v. Green & Freedman Baking Co., Inc., 134 F.3d 17, 21 (1st Cir.1998);  Ed Peters Jewelry, 124 F.3d at 261;  Coyante v. P.R. Ports Auth., 105 F.3d 17, 21 (1st Cir.1997);  Speen, 102 F.3d at 637.   Nor will “conjecture” or “speculation” over the evidence presented provide sufficient grounds to warrant a fact finding determination by the jury.  Russo v. Baxter Healthcare Corp., 140 F.3d 6, 8 (1st Cir.1998) (citing Katz v. City Metal Co., 87 F.3d at 28).

On appeal we will review the record de novo employing the same criteria applicable to the trial court, and decide whether, as defendant/appellant contends, the jury in this case “as a rational factfinder could have reached no conclusion except that the plaintiff[s] take nothing.”  Logue v. Dore, 103 F.3d at 1043.   See also Russo, 140 F.3d at 8;  Speen, 102 F.3d at 628;  Katz, 87 F.3d at 28.

LAW 75

Generally

Puerto Rico's Law 75 governs the business relationship between principals and the locally appointed distributors/dealers for marketing their products.   The statute was initially enacted to avoid the inequity of arbitrary termination of distribution relationships once the designated dealer had successfully developed a local market for the principal's products and/or services.   Euromotion, Inc. v. BMW of N. Am., Inc., 136 F.3d 866, 870 (1st Cir.1998);  Borschow Hosp. and Med. Supplies, Inc. v. César Castillo, Inc., 96 F.3d 10, 14 (1st Cir.1996);  R.W. Intern. Corp. v. Welch Foods, Inc., 88 F.3d 49, 51 (1st Cir.1996).   In order to accomplish its goal Law 75 limited the principal's ability to end the relationship unilaterally except for “just cause,” § 278a, while subjecting the principal to considerable economic liability for terminations without just cause.   See § 278b of Law 75 (enumerating factors to consider in calculating award).

In 1966 the protection afforded to dealers under Law 75 was extended to include the conduct of a principal which even though it did not end the contract 1 it was deemed detrimental 2 to the distribution relationship.   The amendment further provided that impairments without just cause would subject the infringing party to the same liability provided for terminations under § 278b.

Impairment

Law 75 enumerates some instances of impairment by way of illustration 3 and establishes a rebuttable presumption of impairment whenever a principal bypasses a dealer by distributing merchandise directly;  appoints additional dealers in contravention of the agreement;  fails to adequately fill orders;  or arbitrarily changes the transportation and/or payment terms. § 278a-1(b)(1)-(4).

The protection afforded dealers by Law 75, however, is circumscribed by those rights acquired under the agreement regulating their business relationship.   Therefore, whether or not an impairment has taken place will depend upon the specific terms of the distribution contract.

The 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 of P.R. v. Makita USA, Inc., 23 F.3d 564, 569 (1st Cir.1994).

The parties do not dispute the fact that, pursuant to the September 2, 1993 agreement, IRG had the exclusive distribution rights of Murad products in Puerto Rico during a trial period lasting from August 25, 1993 through December 31, 1994.4  Further, the document provided that should IRG meet a particular sales quota it would qualify to act as Murad's exclusive distributor for an additional two years.

It is also uncontested that through its infomercial, which commenced airing in Puerto Rico in May 1994, Murad sold its products directly to local clientele.   The uncontroverted evidence at trial also established that Murad never intended the broadcast to be aired in Puerto Rico. This was a fortuitous event brought about by cable carriers not related to Murad in any way.

Murad argues that it is not liable for impairment of the relationship because once notified by plaintiffs-appellees of the broadcast in Puerto Rico it promptly gave instructions for this sales mode to be discontinued.

A principal may not be held accountable for unknown market interference by third parties.   However, once put on notice that its products are reaching an area of limited distribution rights a principal has the obligation to take prompt positive action to curtail the practice.   Even though its role was not to “stand as a vigilant dog”, Gen. Office Prod. Corp. v. Gussco Mfg., Inc., 666 F.Supp. 328, 333 (D.P.R.1987), once informed of the local transmission Murad did have an affirmative duty to ensure that the direct sales would cease and avoid further interference with the Puerto Rico market.

Murad argues that it was alerted to the local transmission of the broadcast “for the first time” via a letter dated October 14, 1994 forwarded by Catherine Irvine (Appellant's brief at 6) and that it immediately responded by taking steps to avoid its recurrence.   However, there is enough information in the record from which a reasonable jury could infer that Murad was advised of the broadcast much earlier than October 14, 1994.

At trial Dr. Murad acknowledged having been informed of the broadcast matter “a few weeks before” receiving the October 14, 1994 letter.   Further, this correspondence makes reference to a request made by IRG “[a]bout a month ago” for a list of local customers who had placed orders through the infomercial which presupposes Murad had been notified of this practice long before the letter was mailed.   The letter also points to an earlier telephone call by Gerard Sarnataro, Catherine Irvine's husband, on behalf of IRG “several days ago” notifying of direct orders placed by him and others.   Lastly, the letter was a follow-up to a prior conversation between Catherine Irvine and Dr. Murad demanding some kind of response from Murad which again proves earlier contacts regarding the prohibited availability of Murad products through the infomercial.

Irvine also testified that she, her daughter and son-in-law “started feeling the negative effects” of the infomercial in the summer of 1994.   She related how customers and beauty salon owners complained to her that the products were being made available through the television at lower prices.   Irvine further indicated that she, her daughter and her son-in-law “immediately got in touch with Mr. Angelo Fiorita,” Murad's representative, to express their concern (emphasis ours) and that Mr. Fiorita responded that he would “speak with Dr. Murad and ․ take the necessary steps for this to stop happening.”   However, according to Irvine's testimony, “[n]othing happened.”   Irvine explained that the October 1994 letter was eventually sent to Murad because the situation continued to worsen without any corrective measures being taken by Murad.

Gerard Sarnataro testified that he placed orders from Puerto Rico “several times to test out” how long Murad would continue the practice of selling the products directly in the local market.   Mr. Sarnataro further indicated that he continued purchasing products from Puerto Rico and calling Murad to object to what he considered an unauthorized practice.   At trial Mr. Sarnataro also described how, despite his complaints, approximately two months later he had been approached over the telephone to inquire if he was interested in reordering Murad's products.

Murad's first remedial action was taken on October 25, 1994.5  Because the jury could logically infer that Murad was put on notice of the interference soon after May 1994 Murad's argument that it responded diligently is undermined by the evidence in the record.   Therefore, a reasonable fact finder could have found that the exclusive distribution provision of the contract had been impaired by Murad's failure to take prompt positive action in reacting to IRG's complaints.   However, our analysis under Law 75 does not conclude here.

Damages

The jury awarded IRG $390,000 as damages under Law 75.   The statute establishes a formula for the indemnification of dealers/distributors in the event of either termination or impairment to the relationship by a principal without just cause.   However, Law 75 specifically limits payment “to the extent of the damages caused [the dealer/distributor]” § 278b (emphasis ours).   It is clear from reading this provision that damages will not be automatically conferred in all cases of termination and/or impairment.   In this regard the Puerto Rico Supreme Court specifically held in Marina Indus. Inc. v. Brown Boveri Corp., 114 D.P.R. 64, 90 (1983) that the factors enumerated in § 278b are not mandatory.   Rather, they constitute guidelines to be utilized contingent upon the presentation of adequate proof in each case.   Further, in Marina Industrial the Supreme Court acknowledged that evidence of damages is an essential element of a Law 75 violation as to which plaintiff bears the burden of proof.   Therefore, in order to prevail, a Law 75 plaintiff must submit evidence of damages as part of its action.

A claim for impermissible termination or impairment of a dealership contract under section 278 has two essential elements;

that the contract existing between the parties was impaired or terminated without just cause and that there were resulting damages.   After the plaintiff has shown an impairment or termination of the contract, the defendant may offer the affirmative defense of just cause.   If there was no just cause, the plaintiff must show damages.

Draft-Line Corp. v. Hon Co., 781 F.Supp. 841, 843 (D.P.R.1991) aff'd, Draft-Line Corp. v. The Hon Company, 983 F.2d 1046 (1st Cir.1993) (unpublished table decision).

The evidence presented at trial to justify damages to IRG consisted of the testimony of Irvine as well as the opinion of Radamés Alvarez Menéndez, an accountant.   According to Irvine, as a result of the infomercial IRG “sales began to decline dramatically” in August-September 1994.   The “business began collapsing little by little ․ and in the end the business virtually came apart.”   However, the invoices of Murad products sold to IRG during 1994 through April 1995 directly belie this testimony 6 as well as the conclusions reached by the expert witness.

The opinion rendered by plaintiffs' expert to justify IRG's damages was based on a formula using the ratio between the number of clinics opened by IRG and the corresponding volume of sales.   The expert then proceeded to make a projection of the anticipated sales of IRG had it opened 25 clinics within a term of five years as originally planned.   However, the revenues employed as a basis for this computation were based on the total sales of IRG for the fiscal year 7 running from July 1, 1993 through June 30, 1994 without any reference to the sale of Murad products in particular.   Mr. Alvarez Menéndez assumed that all sales and services provided by IRG for that period of time were exclusively Murad products which was not the case.   When confronted with the increase of orders of Murad products throughout 1994 the expert conceded that this was “not consistent” with the overall decline of sales by IRG for the same period.

More significantly, according to Mr. Alvarez Menéndez the drop in sales 8 and closing down of clinics 9 commenced “after the second quarter of 1994 [that is, October through December of 1993]” which confirms that the downward trend began prior to May 1994, the onset of the alleged impairment by Murad.

Inasmuch as plaintiffs did not challenge in any way the authenticity of Murad's invoices and/or the veracity of the information contained therein the amount of IRG sales for this period is conclusive on this matter.   Further, if indeed IRG's purchases of Murad products remained unaltered despite the brief period of Murad's direct sales in Puerto Rico IRG could not reasonably argue that it had been injured by Murad even if Murad had breached the exclusivity clause of their distribution agreement.   Given this uncontested factual scenario a reasonable jury could not plausibly conclude that the damages complained of by IRG arose as a result of the principal's alleged impairment.   IRG's Law 75 claim must fail for having failed to establish a causal connection between its economic downfall and Murad's forbidden infomercial.10  Accordingly, IRG's cause of action should have been DISMISSED.

INDIVIDUAL CLAIM

The jury awarded Ileana Irvine $100,000 as damages for her pain and suffering and loss of reputation due to Murad's negligent actions regarding the infomercial.

Murad contends that Irvine has no personal cause of action and that there was no evidence of a causal relationship between its “purchase of air time for the infomercial at a New York television station” and Irvine's purported damages (Appellants' Brief at 28).

In this jurisdiction 11 tort liability is governed by art. 1802 of the Puerto Rico Civil Code, P.R. Laws Ann. tit. 31, § 5141 (1990) which imposes responsibility for damages caused by negligence or fault.   The necessary elements to prevail in a tort action are:  (1) a negligent act or omission, (2) damages and (3) a causal relationship between them.  De-Jesús-Adorno v. Browning Ferris Indus. of P.R., Inc., 160 F.3d 839, 842 (1st Cir.1998);  Marshall v. Pérez-Arzuaga, 828 F.2d 845, 847 (1st Cir.1987);  Montalvo-Feliciano v. Cruz-Concepción, 144 D.P.R. ----, 98 JTS 6 at 495, 499 (1998);  Toro-Aponte v. E.L.A., 142 D.P.R. ----, 97 JTS 18 at 627 (1997).

Not all actions or omissions which result in injuries/damages will give rise to liability under art. 1802.  “Negligence has been defined by the Commonwealth courts as the failure to exercise due diligence to avoid foreseeable risks.”  Malavé-Félix, 946 F.2d at 971.   Therefore, liability will only arise if the damages complained of were reasonably foreseeable to the defendant.  De-Jesús-Adorno, 160 F.3d at 842;  Montalvo-Feliciano, 144 D.P.R. ----, 98 JTS at 499;  Toro-Aponte, 142 D.P.R. ----, 97 JTS at 627;  Ocasio Juarbe v. Eastern Airlines, Inc., 125 D.P.R. 410, 418 (1990), official translation reproduced in full in 902 F.2d 117 (1st Cir.1990);  Rivera Pérez v. Cruz Corchado, 119 D.P.R. 8, 18 (1987).   The duty of care imposed upon a tortfeasor is anticipating reasonably probable injuries to probable victims.  Marshall v. Pérez Arzuaga, 828 F.2d 845.   See Herminio M. Brau, Los Daños y Perjuicios Extracontractuales en Puerto Rico § 7.02[2] at 184-5 (2d ed.1986).   The foreseeability contemplated by the statute does not include every conceivable consequence of an act or omission since to do so would make the defendant an absolute insurer.   See Montalvo-Feliciano, 144 D.P.R. ----, 98 JTS at 499;  Pacheco v. A.F.F., 112 D.P.R. 296, 300 (1982);  Jiménez v. Pelegrina Espinet, 112 D.P.R. 700, 704 (1982).

For purposes of our analysis we will assume that the conduct complained of by Irvine in support of her negligence claim is the same utilized by IRG for its Law 75 action, i.e., allowing the Murad products to be sold directly in Puerto Rico.12

Inasmuch as our review of the claim is limited by the constraints of a Rule 50 motion, the issue then becomes whether there is sufficiently reliable evidence in the record for a jury to conclude that the mental anguish and loss of reputation averred by Irvine were reasonably to be foreseen to Murad as a probable consequence of the infomercial.   In other words whether, based on the facts presented at trial as well as the permissible inferences derived therefrom, it was reasonable for the trier of fact to find that Murad should have anticipated the resulting damages to Irvine individually.   As previously mentioned, there is no actionable claim under art. 1802 if the particular injury/damage complained of by Irvine could not have been reasonably foreseen by Murad.

Even though Irvine described in detail the alleged injuries to her reputation, humiliation and pain and suffering caused by Murad's airing of the infomercial in Puerto Rico, liability based on art. 1802 cannot rest on the existence of an injury alone.13  Irvine did not introduce any evidence to explain why it should have been reasonably foreseeable to Murad that making its products available in Puerto Rico at lower prices would somehow affect her personally.   At trial when asked by her counsel to describe her relationship with Murad, separate from that of IRG, Irvine merely responded that it was “cordial” and that she found Dr. Murad “very pleasant.”   Her testimony in this regard was circumscribed by the tenor of her and her daughter's contacts with the Murad representatives.   No mention was made of any particular circumstances in her dealings with Murad which would support her individual claim.

Additionally, the documentary evidence submitted at trial further supports Murad's theory.   The distribution agreement was made with the corporation, not Irvine.   All the correspondence available in the record which was exchanged between Murad and plaintiffs/appellants was conducted through the corporation.

Accordingly, Irvine did not produce any evidence at trial from which the jury could reasonably conclude that her personal damages were a probable and foreseeable consequence of Murad's infomercial.   Irvine's individual claim must also be DISMISSED for having failed to meet her burden of proof.

CONCLUSION

Accordingly, we direct the district court to set aside the judgments on both the corporate and individual claims and enter judgment as a matter of law in the appellant's favor.

FOOTNOTES

1.   P.R. Laws Ann. tit. 10, § 278a (1997) reads:Notwithstanding the existence in a dealer's contract of a clause reserving to the parties the unilateral right to terminate the existing relationship, no principal or grantor may directly or indirectly perform any act detrimental to the established relationship or refuse to renew said contract on its normal expiration, except for just cause.(Emphasis ours).

2.   The term “detrimental” which appears in the English version of the statute is a translation for “menoscabo” which also means “ ‘impairment,’ ‘diminution,’ ‘deterioration,’ or ‘undermining.’ ”  A.M. Capen's Co., Inc. v. Am. Trading and Prod. Corp., 973 F.Supp. 247, 260 n. 12 (D.P.R.1997).

3.   The Report of Committee on Industry and Commerce, House of Representatives, IV Servicios Legislativos 637-38 (1966), concedes that it would be impossible to enumerate all acts constituting impairment.

4.   The document provides that defendant/appellant “will not sell Murad branded products in Puerto Rico thru any organization other than IRG” during the particular time period.   Although Murad argued at trial that this clause did not preclude direct sales to individual consumers, this issue was not developed on appeal.

5.   A memorandum was forwarded to Murad's sales personnel on October 25, 1994 advising that “effective immediately” the entity handling the calls originating from the infomercial would no longer take orders from Puerto Rico and would be referred to IRG instead.

6.   Sales for the period extending from January 1994 to May 1994-when the infomercial premiered-totaled $28,451.81 and from June through December 1994 increased to $35,971.36.   The last sales reported were from January through April 1995 amounting to $4,460.16 at which time the uncontested evidence reflects that IRG voluntarily ceased ordering Murad products.   There is no allegation or evidence in the record regarding Murad's termination of the relationship.

7.   The expert testified in terms of fiscal years not calendar years.   Most of his opinion pertained to the fiscal year running from July 1, 1993 through June 30, 1994 which he ordinarily referred to as “1994.”

8.   The accountant summarized the total of IRG sales for the following quarters of the 1993-94 fiscal year as follows:2nd quarter [10-12/93] = $163,8943rd quarter [1-3/94] = $156,0224th quarter [4-6/94] = $149,619

9.   IRG had established nine clinics by the end of the second quarter of 1994 [10-12/93] which decreased to eight by the third quarter of 1994 [1-3/94].

10.   Given our disposition of this claim there is no reason to address IRG's argument of impairment by Murad offering its products to the general public at allegedly lower prices.

11.   This action is grounded on diversity jurisdiction and hence, we apply local substantive law.  Marshall v. Pérez Arzuaga, 828 F.2d 845, 847 (1st Cir.1987).

12.   The underlying facts in support of Irvine's individual claim were not developed independent of IRG's cause of action.

13.   Irvine argued that the withdrawal of her own line of products provided added support to her personal cause of action (Appellee's Brief at 18).   However, this particular aspect of her claim is not properly before us.   It was dismissed by the trial court in response to Murad's Rule 50 request due to Irvine's failure to introduce evidence of economic injury and its dismissal was not contested by Irvine on appeal.

ACOSTA, Senior District Judge.