Food distributor José Santiago Inc. sues Smithfield Foods for $30M
Food service distributor José Santiago Inc. filed a lawsuit against Virginia-based Smithfield Foods, seeking $30 million in damages for breaching Puerto Rico Act 75, which prohibits the termination of a distribution agreement without “just cause.”
In the filing, the local company, which caters to public and private institutions islandwide, stated that it became the exclusive food service distributor of Farmland Foods Inc. Oct. 10, 1995. In 2003, Smithfield bought the Farmland brands that José Santiago still distributed exclusively in Puerto Rico.
Since then, the local company claimed it has distributed more than $100 million in Farmland and Smithfield branded products throughout Puerto Rico. In 2021, it reported more than $11 million in annual sales of Smithfield products.
However, things took a turn in October 2019, when representatives from both companies met and Smithfield allegedly told José Santiago Inc. that despite a brand consolidation process in the works, the latter company had decided to keep the Farmland brand for its products that José Santiago Inc. sold in Puerto Rico.
The local company was also reportedly told that if the Farmland brand was ever converted to another brand as part of Smithfield’s consolidation with Hong Kong-based WH Group, that José Santiago Inc. would remain the exclusive distributor of any resulting Smithfield brand sold in Puerto Rico.
But on May 18, 2020, José Santiago Inc. stated that it received notice from Smithfield that during the following six months it would streamline its brand offerings and that most of its core branded products, including Farmland, would become Smithfield products.
The following month, José Santiago Inc. representatives met with high-ranking Smithfield officials who confirmed that effective January 2021 Smithfield’s strategy would be to reduce the number of brands sold from more than a dozen to two and that, because of this strategy, the Farmland brand that José Santiago Inc. distributed would no longer be sold in any market, including Puerto Rico, as everything would be marketed under either the Smithfield or the Margherita brand.
That was when Smithfield explained that José Santiago would then become the exclusive distributor of the Farmland brand in Puerto Rico, and its competitor — Ballester Hermanos Inc. — would take over distribution of the Margherita line.
Smithfield allegedly backtracked from its agreements with José Santiago Inc. and intended for both companies to distribute the Smithfield-branded products in Puerto Rico, according to the lawsuit.
“In violation of its agreement with José Santiago, Smithfield decided that it would not recognize an exclusive distributorship of Smithfield products in Puerto Rico and that now both distributors would have to offer the products to the Puerto Rico market,” José Santiago Inc. claimed in the lawsuit filed in the US District Court for Puerto Rico.
Talks continued and earlier this month, Smithfield notified José Santiago Inc. that after May 31, 2022, it had decided not to make available for distribution in Puerto Rico certain Smithfield products, which the local firm would either have to accept or face the termination of the agreement. The deadline for José Santiago Inc. to decide which of the two options it would select was extended to June 15, 2022.
“By deciding not to make available to José Santiago Smithfield products for distribution in Puerto Rico after June 15, 2022, unless it chooses from illegal options presented, Smithfield is effectively terminating José Santiago as the distributor of Smithfield brand products in Puerto Rico,” according to the lawsuit.
If the Court determines that José Santiago Inc. is not a distributor protected by Act 75, José Santiago Inc. alleges that Smithfield breached its duty of fair dealing and good faith by negligently breaching its contractual obligations with José Santiago Inc. and by deciding to terminate the contractual relationship between the parties without cause.
José Santiago Inc. has asked the court for a preliminary injunction preventing Smithfield from terminating the existing contractual relationship during the litigation of the case. A hearing for that petition is set for June 10 before US District Court Judge Silvia L. Carreno-Coll.