G.R. No. 153674 - Avon Cosmetics, Inc. vs. Luna

Case Summary (G.R. No. 153674)

Factual Background

Leticia H. Luna began working for Beautifont, Inc. in 1972 and continued with its successor, Avon Cosmetics, Inc., after Avon acquired Beautifont in 1978. Luna functioned as a Supervisor and a make-up artist for Avon's Theatrical Promotion's Group, receiving per diems for performances. On 5 November 1985, the parties executed a written Supervisor's Agreement by which Luna became part of Avon's independent sales force. Paragraph 5 of that agreement provided that the Supervisor "shall sell or offer to sell, display or promote only and exclusively products sold by the Company"; paragraph 6 allowed either party to terminate the agreement "at will, with or without cause, at any time upon notice to the other." In late 1988 Luna accepted employment with Sandre Philippines, Inc. as a Group Franchise Director while remaining an Avon Supervisor and sold Sandre products to Avon employees and acquaintances. Luna procured a legal opinion dated 23 September 1988 concluding that certain provisions of the Supervisor's Agreement were "contrary to law and public policy" and circulated that opinion to colleagues. Avon notified Luna by letter dated 11 October 1988 that it was terminating the Supervisor's Agreement for violating paragraph 5 and inducing other supervisors to violate their contracts.

Trial Court Proceedings

Aggrieved by the termination, Leticia H. Luna filed a complaint for damages in RTC, which after trial rendered judgment on 26 January 1996 in her favor. The RTC awarded moral damages in the amount of P100,000, attorney's fees of P20,000, and costs. The RTC found invalid the challenged contractual provisions and held Avon liable for unlawful termination and damages.

Court of Appeals Decision

On appeal, the Court of Appeals affirmed the RTC's judgment in toto by decision dated 20 May 2002 in CA-G.R. CV No. 52550. The appellate court interpreted the Supervisor's Agreement's exclusivity clause so as to apply only to products directly in competition with Avon's goods. The Court of Appeals concluded that an agreement prohibiting a person from engaging in any enterprise whether similar or not to the enterprise of the employer constituted an unreasonable restraint of trade and was void as against public policy. The appellate court thus sustained the RTC's finding that paragraph 5 was contrary to public policy and that paragraph 6 could not validly authorize termination without cause.

Issues Presented to the Supreme Court

In its Rule 45 petition, Avon Cosmetics, Inc. assigned four errors: first, that the Court of Appeals erred in declaring the Supervisor's Agreement void as against public policy; second, that Avon had the right to terminate or cancel the Supervisor's Agreement; third, that the Court of Appeals erred in upholding the award of moral damages and attorney's fees to Luna; and fourth, that the Court of Appeals erred in not awarding attorney's fees and litigation expenses to Avon.

Petitioners’ Contentions

Avon argued that the plain language of the Supervisor's Agreement — particularly the words "only and exclusively" in paragraph 5 — plainly excluded supervisors from selling any products of other companies, whether competing or not. Avon maintained that the exclusivity clause was designed to protect the network, training, and goodwill that Avon had cultivated at its expense and that Sandre exploited Avon supervisors' training and market contacts to distribute its products. Avon further contended that the termination clause in paragraph 6 validly authorized termination with or without cause and that the Court of Appeals improperly read limitations into the clear contractual terms.

Respondent’s Contentions

Leticia Luna disputed Avon's assertions and maintained that the exclusivity clause could not be interpreted to bar supervisors from selling noncompeting products. Luna relied on the legal opinion she obtained, which invoked Ferrazzini v. Gsell and concluded that paragraph 5 was an unreasonable restraint of trade because it restricted supervisors from engaging in sales in general. Luna also argued that there was no factual showing that Avon had an "existing nationwide sales and promotions network" or that Sandre's use of Avon supervisors caused the kind of market foreclosure or public injury that would justify enforcing an absolute exclusivity restriction.

Supreme Court’s Analysis — Nature of the Questions

The Supreme Court treated the threshold disputes — the validity of paragraph 5 as against public policy and the validity of paragraph 6 permitting termination without cause — as questions of law. The Court explained that questions of law are amenable to resolution on appeal without re-evaluating evidence and are therefore proper for Rule 45 review in this context.

Legal Reasoning on the Exclusivity Clause

The Court reviewed the constitutional proscription against restraints of trade under Section 19 of Article XII of the 1987 Constitution and reiterated established principles: restraints are not per se unlawful; each restraint must be judged according to its circumstances and whether it tends to injure the public or unduly foreclose competition. The Court surveyed pertinent authorities, including Ferrazzini v. Gsell and United States jurisprudence, and recognized that only arrangements whose probable effect is to foreclose competition in a substantial share of the relevant market are void as against public policy. Applying these principles, the Court found that paragraph 5's purpose was to protect Avon's investment, network, training, and goodwill and that the prohibition did not aim to eliminate competition or to foreclose Sandre or other entrants from the market. The Court accepted Avon's showing that Sandre deliberately sought Avon supervisors to bypass the expense of recruiting and training a distribution network. The Court also rejected the characterization of the Supervisor's Agreement as per se invalid as a contract of adhesion, noting that adhesion contract

Case Syllabus (G.R. No. 153674)

Parties and Posture

AVON COSMETICS, INCORPORATED and JOSE MARIE FRANCO filed a Petition for Review on Certiorari under Rule 45, Rules of Court from the decision of the Court of Appeals.
LETICIA H. LUNA was the respondent and plaintiff below who obtained judgment in her favor in the Regional Trial Court of Makati City, Branch 138, Civil Case No. 88-2595.
The RTC rendered judgment on 26 January 1996 awarding moral damages and attorney’s fees to LETICIA H. LUNA.
The Court of Appeals affirmed the RTC decision in CA-G.R. CV No. 52550 by Decision dated 20 May 2002.
The Supreme Court, through this petition reported as G.R. No. 153674, granted the petition and reversed and set aside the Court of Appeals decision.

Key Facts

LETICIA H. LUNA began with Beautifont, Inc. in 1972 and continued as a supervisor after AVON COSMETICS, INCORPORATED acquired Beautifont in 1978.
LETICIA H. LUNA signed a Supervisor’s Agreement with AVON COSMETICS, INCORPORATED on 5 November 1985 and became part of Avon’s independent sales force.
Late in 1988, LETICIA H. LUNA became a Group Franchise Director of Sandre Philippines, Inc. while still serving as an Avon Group Supervisor.
LETICIA H. LUNA circulated a lawyer’s opinion dated 23 September 1988 that declared parts of her Supervisor’s Agreement contrary to law and public policy.
AVON COSMETICS, INCORPORATED sent a letter dated 11 October 1988 terminating the Supervisor’s Agreement for alleged violation of paragraph 5, and LETICIA H. LUNA filed a complaint dated 1 December 1988.
The RTC awarded LETICIA H. LUNA moral damages of P100,000.00, attorney’s fees of P20,000.00, and costs, which the Court of Appeals affirmed before the Supreme Court reversed.

Contract Provisions

The Supervisor’s Agreement expressly stated that the Supervisor was not an employee or agent of the Company and that the Supervisor was an independent retailer/dealer.
The Supervisor’s Agreement contained an exclusivity clause in paragraph 5 providing that the Supervisor shall sell or offer to sell, display or promote only and exclusively products sold by the Company.
The Supervisor’s Agreement contained a termination clause in paragraph 6 providing that either party may terminate the agreement at will, with or without cause, at any time upon notice to the other.
The Supervisor’s Agreement also restricted resale to certain outlets by prohibiting sales to stores and supermarkets as stated in the contract.

Issues

The central legal issues were whether paragraph 5 of the Supervisor’s Agreement was void as against public policy for being an unreasonable restraint of trade.
The central legal issues also included whether paragraph 6 of the Supervisor’s Agreement authorizing termination at will was void as contrary to law and public policy.
The petition further questioned the propriety of the awards of moral damages and attorney’s fees to LETICIA H. LUNA.
The petition finally raised the issue whether AVON COSMETICS, INCORPORATED was entitled to attorney’s fees and litigation expenses.

Contentions

AVON COSMETICS, INCORPORATED contended that the words “only and exclusively” in paragraph 5 should be given their literal meaning to prevent supervisors from selling any other company’s products and to protect Avon’s investment in its trained sales network.
AVON COSMETICS, INCORPORATED argued that Sandre Philippines, In