Valentine v. Mobil Oil Corp.

Citation789 F.2d 1388
Decision Date30 May 1986
Docket NumberNo. 85-2029,85-2029
PartiesDavid P. VALENTINE, Plaintiff-Appellant, v. MOBIL OIL CORP., Defendant-Appellee.
CourtUnited States Courts of Appeals. United States Court of Appeals (9th Circuit)

Ronald W. Meyer, Phoenix, Ariz., for plaintiff-appellant.

N. Warner Lee, Michael C. Cox, Ryley, Carlock & Applewhite, Phoenix, Ariz., for defendant-appellee.

Appeal from the United States District Court for the District of Arizona.

Before POOLE, BEEZER and KOZINSKI, Circuit Judges.

KOZINSKI, Circuit Judge.

We consider whether, under the Petroleum Marketing Practices Act, 15 U.S.C. Sec. 2801 et seq. (the PMPA), an oil company may decline to renew a gas station franchise because the franchisee will not consent to alterations in the structure and operation of the station.

Facts 1

For the past ten years David Valentine has operated a gas station in Scottsdale, Arizona, under successive leases and retail-dealer contracts with Mobil. These agreements constitute a franchise relationship as defined by the PMPA. 15 U.S.C. Sec. 2801(2).

Valentine operates what is known as a full-service gas station. In addition to selling gasoline and automobile accessories, he also repairs and services cars. The repair and maintenance operation, known as the back room, generates approximately half of Valentine's income. He has spent over $50,000 to equip his back room.

Another type of gas station, known as a pumper, is becoming prevalent in the industry. Gasoline is sold only to those motorists willing and able to pump it themselves. No one repairs cars or sells automotive products, so there is no back room. Instead, there is generally a convenience store where groceries and sundries are sold.

Valentine's most recent franchise ran from September 1, 1980, to August 31, 1983. In April 1983, Mobil offered to renew Valentine's franchise. The proposed franchise agreement contained changes in rent and hours of operation, as well as a "redevelopment rider" giving Mobil sole discretion to "mak[e] a substantial redevelopment of the premises which may include a change in configuration, and may include the elimination of the service bays." On April 27, 1983, Valentine rejected the redevelopment rider and suggested alternate hours of operation and a different way to calculate rent. Valentine maintains, however, that if Mobil had deleted the redevelopment rider, he would have accepted the remaining terms.

Mobil's representatives and Valentine discussed the new franchise but failed to reach agreement. On May 25, 1983, Mobil sent Valentine a nonrenewal notice that complied with the PMPA's notice requirements. See 15 U.S.C. Sec. 2804.

Valentine sued claiming that the PMPA required Mobil to offer to sell him the station at a fair price before it could end the franchise relationship. Mobil counterclaimed seeking a declaratory judgment that it had complied with the PMPA. On November 9, 1984, 614 F.Supp. 33, the district court granted Mobil's motion for summary judgment. The court found no issues of material fact in dispute and ruled that Mobil's failure to renew the franchise did not violate the PMPA.

Appellant's Contentions

Valentine argues that the PMPA does not allow Mobil to materially restructure the business at the time of renewal. Under appellant's reading of the statute, if Mobil wishes to make such changes--for example by removing the service bays and turning the station into a pumper--it must first offer to sell him the business pursuant to 15 U.S.C. Sec. 2802(b)(3)(D). This subsection provides that if the franchisor does not wish to renew the franchise because it has determined to materially alter, add to or sell the premises, it may decline to renew only after giving the franchisee an opportunity to buy the station. Valentine argues that the proposed redevelopment rider is tantamount to material alteration of the premises because it gives Mobil the right to do precisely that. Under the district court's interpretation, Valentine complains, Mobil can short-circuit the protections of the PMPA by forcing a dealer to accept the redevelopment rider on pain of losing the franchise. Discussion 2

I.

The logic of Valentine's position stands or falls on his contention that the PMPA entitles him to buy the station if Mobil proposes to materially alter the premises. If the statute affords Valentine this right, Mobil is precluded from ending the franchise relationship in response to Valentine's refusal to authorize such changes. On the other hand, if the PMPA does not circumscribe Mobil's right to make substantial alterations, Valentine was not entitled to refuse the redevelopment rider and Mobil was within its rights in declining to renew the franchise relationship.

Our review of the PMPA discloses no provision giving Valentine the right he asserts. The Act, passed in 1978, responded to a widespread perception that the petroleum marketing industry was undergoing drastic changes, with a trend toward fewer stations, many of them pumpers. 3 Congress sought to correct what it perceived as an inequality in bargaining power between distributors of petroleum products and their franchisees by giving franchisees certain protections from arbitrary termination or nonrenewal. S.Rep. No. 731, 95th Cong., 2d Sess. 18, reprinted in 1978 U.S.Code Cong. & Ad.News 873, 877 [hereinafter cited as S.Rep.]; see Baldauf v. Amoco Oil Co., 553 F.Supp. 408, 412 (W.D.Mich.1981), aff'd, 700 F.2d 326 (6th Cir.1983); see generally Humboldt Oil Co. v. Exxon Co., U.S.A., 695 F.2d 386 (9th Cir.1982). A product of compromise, 4 the PMPA affords franchisees important but limited procedural rights, while allowing franchisors significant latitude in responding to changing market conditions. See Brach v. Amoco Oil Co., 677 F.2d 1213, 1223 (7th Cir.1982).

The portion of the PMPA dealing with protection of franchisees is Title I, codified at 15 U.S.C. Secs. 2801-2806. Following definitions, contained in section 2801, section 2802 limits the grounds on which the franchisor may end the franchise relationship. Section 2803 deals with trial and interim franchises, not at issue here. Section 2804 establishes procedures for termination or nonrenewal, giving franchisees an automatic 90 and sometimes 180 days' notice. Section 2805 gives aggrieved franchisees a right of action in federal district court; if successful, they may obtain actual and exemplary damages, injunctive relief and attorney's fees. Section 2806 preempts inconsistent state laws dealing with termination and nonrenewal, except in specific, limited areas.

On their face, none of these provisions gives a dealer the right to continue operating a service station in a particular fashion, or precludes a franchisor from altering the scope or operation of the business. Valentine, however, argues that such restrictions can be inferred from the language of section 2802(b)(3)(D). This section provides that the franchisor may refuse to renew the franchise relationship if it determines in good faith to sell, alter or convert the station, but only if it first offers the dealer an opportunity to purchase the property. By its terms, however, this section addresses only the situation where the franchisor wishes to terminate the franchise relationship; it does not address this case, where Mobil reserves the right to convert the station but wishes to retain Valentine as a franchisee.

The PMPA plainly contemplates that franchisors will have substantial flexibility in changing the terms of a franchise upon renewal. Baldauf, 553 F.Supp. at 415; see Veracka v. Shell Oil Co., 655 F.2d 445, 448 (1st Cir.1981), cited with approval in Humboldt, 695 F.2d at 388. Thus, section 2801 defines two separate concepts: the "franchise," consisting of a specific contract between a franchisor and a franchisee, 15 U.S.C. Sec. 2801(1); and the "franchise relationship," consisting of the mutual obligations and responsibilities between the parties arising from the marketing of motor fuel under a franchise. Id. Sec. 2801(2). 5 Under the PMPA, the franchisor has (absent specific cause) an obligation to renew only the franchise relationship, not the particular franchise. 6 Indeed, section 2802(b)(3)(A) contemplates the possibility of material changes in the terms of the franchise, allowing the franchisor to end the relationship if agreement cannot be reached with respect to such changes.

This reading of section 2802(b)(3)(A) does not, as Valentine suggests, vitiate the protections Congress intended franchisees to have under the PMPA. Franchisors may not insist on arbitrary or pretextual franchise terms. Baldauf, 553 F.Supp. at 412. Any changes must be proposed by the franchisor on the basis of determinations made in good faith, in the normal course of business and not for the purpose of preventing renewal of the franchise relationship. 15 U.S.C. Sec. 2802(b)(3)(A). The PMPA gives the franchisor the burden of establishing that the proposed changes meet this standard. Id. Sec. 2805(c).

Nor is Valentine correct in suggesting that the redevelopment rider gives Mobil a free hand to close up the gas station or convert it to some other type of business, forcing him out of gasoline marketing altogether. While the rider affords Mobil much flexibility in adapting the operation of the business to changing conditions, it may not go so far as to remove the gas pumps and turn the station into a parking lot. The PMPA defines both "franchise" and "franchise relationship" as arrangements involving the sale of motor fuel. 15 U.S.C. Sec. 2801(1), (2). A decision by Mobil to cease operating the premises as a gas station would constitute a proposed termination of the franchise, triggering the protections of the PMPA. See 15 U.S.C. Sec. 2802(b)(2)(E), (b)(3)(D).

Having determined that the statute does not on its face grant Valentine the rights he claims, we decline his invitation to look for such rights in the PMPA's penumbra in...

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