Exclusive

Some agreements involving sales supervisors or agents usually contain an "exclusivity clause" providing that the supervisor "shall sell or offer to sell, display or promote only and exclusively products sold by the Company". Does this exclusivity clause violate Section 19, Article XII of the Constitution disallowing combinations in restraint of trade or unfair competition? This is the question resolved in the case of Celia.

Celia started working with a beauty products and cosmetic company (ACI) way back in 1972 first as franchise dealer then as a sales supervisor sometimes also acting as a make-up artist. On November 5, 1985, Celia became a supervisor and part of the independent sales force of ACI. As supervisor, she signed a supervisor’s agreement with ACI providing among others: (5) That the supervisor shall sell or offer to sell, display or promote only and exclusively products sold by the company; and (6) That, either party may terminate this agreement at will, with or without cause.

Sometime in the latter part of 1988 Celia was invited by a former ACI employee who was then currently the sales manager of a corporation selling vitamins and other food supplements (SPI), to sell said products. Celia accepted the invitation and became a group franchise director of SPI aside from being a group supervisor of ACI. Thus, she also began selling and/or promoting SPI products to other ACI employees and friends. Just to be sure that she was not violating the supervisor’s agreement with ACI she consulted a law firm which opined that Section 5 is not valid because it is contrary to public policy, being an unreasonable restraint of trade, and that Section 6 is not valid because it is contrary to law and public policy. The company cannot terminate the supervisor’s agreement without a valid cause, according to this law firm. She even shared the legal opinion of her legal counsel with her colleagues by mimeographing and circulating them.

When ACI learned of Celia’s activities, its president wrote Celia on October 11, 1988 notifying her that for selling and promoting SPI products in violation of paragraph 5 and for writing to other members of the ACI sales force to violate their own contracts, it is terminating the supervisor’s agreement with Celia effective upon notice, pursuant to paragraph 6.

Aggrieved, Celia filed a complaint against ACI for moral damages, attorney’s fees and costs of suit. She contended that she did not violate paragraph 5 because the prohibition in said paragraph applies solely to those products directly in competition with the products of ACI. If said exclusivity clause prohibits her from selling other products and engaging in other enterprise, it is imposing an unreasonable restraint on trade and competition. Hence, according to Celia, there was no valid cause for her dismissal. Was Celia correct?

No. Restraint in trade or competition is unreasonable when it is contrary to public policy or public welfare or has a tendency to be injurious to the public or against the public good, or is inconsistent with sound policy and good morals, or tends clearly to undermine the security of individual rights, whether of personal liability or of private property. There is nothing invalid or contrary to public policy in the objectives sought to be attained by paragraph 5, in prohibiting Celia and all other ACI supervisors from selling products other than those it manufactures. Such prohibition is not directed to eliminate competition like SPI or to foreclose new entrants to the market. It is intended merely to safeguard the network that ACI has cultivated through the years. Both ACI and SPI employ the direct selling method under which they forego the use of the middleman and thus control their selling price. The limitation does not affect the public at all. It is only a means by which ACI is able to protect its investment.

By making Celia an important part of its distribution arm, SPI, a newly formed direct-selling business would be saving time, effort and money as it will no longer have to recruit, train and motivate supervisors and dealers. Celia who learned the tricks of the trade from ACI will do it for them. This is tantamount to unjust enrichment. Worse, the goodwill established by ACI will be taken advantage of by SPI. The sale of SPI products by ACI dealers will engender a belief in the minds of loyal ACI customers that the product they are buying have been manufactured by ACI. The exclusivity clause does not, in any way limit the selling opportunities of SPI, just the undue use of the resources of ACI. The exclusivity clause is therefore valid and not against public policy.

The termination clause in paragraph 6 provides for two ways of terminating the agreement, i.e. with or without cause. One mode does not exclude the other, both at any time and after written notice. This is legitimate if exercised in good faith. Thus whether or not the termination of the supervisor’s agreement was for cause is immaterial. When ACI terminated "without cause", it was required only to give a 30 day written notice which it did. Worth stressing is that the right to terminate the Agreement unilaterally with or without cause is equally available to Celia subject to the same notice requirement. Obviously, neither party has taken advantage of the other. Celia’s complaint should therefore be dismissed (Avon Cosmetics Inc. et. al. vs. Luna, G.R. 1534674, December 20, 2007).

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