Title
Avon Cosmetics, Inc. vs. Luna
Case
G.R. No. 153674
Decision Date
Dec 20, 2006
Luna, an Avon supervisor, violated an exclusivity clause by selling SandrA products. Avon terminated her contract; SC upheld the clause, ruled termination valid, and reversed damages awarded to Luna.
avon cosmetics inc
luna
null and void
A

Case Summary (G.R. No. 153674)

Facts

Luna began working for Beautifont, Inc. in 1972 as a franchise dealer and later as a Supervisor. Avon acquired Beautifont in 1978 and Luna continued working with the successor. She also performed make-up artist duties and received per diems for theatrical performances. On 5 November 1985, Avon and Luna executed a "Supervisor’s Agreement" under which Luna was an independent retailer/dealer with an exclusivity provision (paragraph 5) and a termination-at-will provision (paragraph 6). In late 1988 Luna accepted a position with SandrA as a Group Franchise Director and began selling/promoting SandrA products, including to Avon employees. On 23 September 1988 she obtained and circulated a legal opinion stating portions of the Supervisor’s Agreement (notably paragraph 5 and paragraph 6) were contrary to law and public policy. Avon terminated the Supervisor’s Agreement by letter dated 11 October 1988, citing violations of paragraph 5 and the inducement of other Avon supervisors. Luna filed a complaint for damages (Civil Case No. 88-2595). The RTC awarded moral damages (P100,000), attorney’s fees (P20,000), and costs. The Court of Appeals affirmed. Avon petitioned the Supreme Court by certiorari under Rule 45.

Procedural History

  • Complaint filed by Luna: 1 December 1988 (RTC Makati, Civil Case No. 88-2595).
  • RTC rendered judgment in favor of Luna: 26 January 1996 (moral damages, attorney’s fees, costs).
  • Avon filed Notice of Appeal: 8 February 1996; appeal docketed with the Court of Appeals as CA-G.R. CV No. 52550.
  • Court of Appeals rendered decision affirming RTC: 20 May 2002.
  • Avon filed a Petition for Review on Certiorari under Rule 45 with the Supreme Court. The Supreme Court granted the petition and reversed and set aside the decisions below, dismissing Luna’s complaint and awarding costs against her.

Issues Presented

The petition advanced four principal assignments of error:
I. Whether paragraph 5 of the Supervisor’s Agreement (the exclusivity clause) is null and void for being against public policy.
II. Whether Avon had the right to terminate/cancel the Supervisor’s Agreement (paragraph 6).
III. Whether the awards of moral damages and attorney’s fees in favor of Luna were proper.
IV. Whether attorney’s fees and litigation expenses should have been awarded to Avon.

Legal Standard on Restraint of Trade and Exclusivity Clauses

Article XII, Section 19 of the 1987 Constitution prohibits combinations in restraint of trade and unfair competition; the normative test is whether, given the circumstances and the nature of the contract, the restraint is against public interest. Restraints are unreasonable when they injure the public interest by restricting competition or unreasonably preventing an individual from pursuing an occupation. However, exclusivity or restrictive covenants are not per se void; each must be assessed in light of whether the limitation is no greater than necessary for fair and reasonable protection of the party in whose favor it is imposed and whether its probable effect is to foreclose competition in a substantial share of the relevant market. The Court uses authorities such as Ferrazzini v. Gsell and U.S. precedents (Board of Trade of Chicago v. U.S., etc.) to articulate that contracts are judged by their circumstances and the extent to which they suppress competition versus reasonably regulate it.

Court of Appeals’ Interpretation of Paragraph 5

The Court of Appeals interpreted the exclusivity clause (“shall sell or offer to sell, display or promote only and exclusively products sold by the Company”) to be limited to products directly in competition with Avon’s (i.e., cosmetics, beauty supplies, lingerie). The appellate court’s rationale was that to extend the prohibition to non-competing products would be absurd and constitute an unreasonable restraint of trade, as agreements that prohibit a person from engaging in any enterprise whether similar or not to the enterprise of the employer are generally viewed as unreasonable restraints.

Petitioner and Respondent Arguments Regarding Paragraph 5

Avon argued that the words “only and exclusively” should be given their literal meaning and therefore ban supervisors from selling any products of other companies, whether competitive or not, because the clause protects Avon’s investment in and network of trained personnel and customers; permitting other companies to use that network would unjustly enrich them and exploit Avon’s resources. Luna (and her counsel) argued that paragraph 5 was an unreasonable restraint of trade, relying on the Ferrazzini principle and contending that the clause did not allege or prove the existence of an established Avon nationwide sales and promotions network or show damage to such a system caused by SandrA.

Supreme Court Analysis and Ruling on Paragraph 5

The Supreme Court rejected the Court of Appeals’ limitation of the exclusivity clause to directly competing products. The Court concluded that paragraph 5 was not void as against public policy. Key points in the Court’s analysis:

  • The determinative inquiry is whether the restraint merely regulates competition or whether it suppresses or destroys competition. The exclusivity clause here was to protect Avon’s investment in its sales network and did not foreclose SandrA or other entrants from competing in the market generally. SandrA remained free to distribute its products, but could not improperly exploit Avon’s trained salesforce and goodwill without incurring its own recruitment and training costs.
  • The clause did not operate to deprive the public of goods or foreclose competition in a substantial share of the relevant market. The alleged harm was to Avon’s proprietary distribution effort and the possible misleading of customers into associating SandrA products with Avon.
  • The Court found merit in Avon’s contention that SandrA utilized Avon’s experienced supervisors to penetrate the market, thereby saving its own recruitment and training expense and potentially appropriating Avon’s goodwill—an unjust enrichment and legitimate ground for Avon to protect its business interests.
  • Contract-of-adhesion arguments did not render the clause invalid per se. Contracts prepared by one party are not automatically void; they are enforceable unless there is evidence of moral abuse or that the weaker party was deprived of the opportunity to bargain on equal footing. Luna, given her experience and financial position, was presumed capable of knowingly consenting to the agreement.

Accordingly, the Supreme Court held that the exclusivity clause should be given its plain and literal meaning and is valid and enforceable under the circumstances.

Supreme Court Analysis and Ruling on Paragraph 6 (Termination Clause)

Paragraph 6 provided that “Either party may terminate this agreement at will, with or without cause, at any time upon notice to the other.” The Supreme Court treated this provision as legitimate and enforceable when exercised in good faith, citing Petrophil Corporation v. Court of Appeals, which upheld the right to terminate pursuant to such a clause provided prescribed notice is given and good faith is observed. The Court emphasized:

  • The clause explic

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