Divorce Tips: How to Avoid Getting Your New Channel Partners Sued

Leaving behind an underperforming dealer or distributor relationship for a new one can be exciting for manufacturers and suppliers. It’s always a good feeling to get a part of the business turned around and headed in the right direction. Be careful, however, that the new relationship doesn’t get bogged down in any acrimony surrounding the departure from the old. This unfortunate situation is amply illustrated by a recent Puerto Rican Court of Appeals case.

AAP Implante, a German manufacturer of surgical products, terminated its relationship with Caribbean Orthopedics Products, its existing distributor in Puerto Rico, and negotiated an agreement with a new distributor, Ortho & Surgical Solutions. Caribbean filed suit against AAP under Puerto Rico’s infamous Law 75, alleging wrongful termination. Unfortunately for AAP’s new relationship, Caribbean also sued Ortho, alleging that the new contract had damaged its relationship with AAP. Caribbean sought $3.5 million in joint and several damages against the new partners.

Adding to the misery, the trial denied Ortho’s motion to dismiss, and the Court of Appeals affirmed, holding that Caribbean had stated a claim for contractual damage to a third party. The Court of Appeals’ reasoning is troubling for manufacturers and suppliers, as Law 75’s legislative intent appears to limit jilted former channel partners to bringing tortious interference claims, which have a higher bar for proof and are subject to a shorter statute of limitation. The Court of Appeals rejected this argument.

The upshot is that both AAP and Ortho can look forward to months, or even years, of disruptive and costly document discovery and depositions – hardly the hopeful new business relationship either was looking to build.

Key Takeaways

Be cautious about negotiating with a new channel partner while still under an existing distribution contract. All discussions should be for a future relationship and should not interfere with the existing dealer or distributor’s business.
Always ensure compliance with all applicable state laws before sending a notice of termination.
Confirm that your distribution agreement with your existing (but soon-to-be-terminated) channel partner allows engagement of a new partner prior to termination. If it does not, then make sure that agreement is completely terminated before engaging the new partner.