Bp West Coast Products LLC v. May, 05-15076.

• Decision Date: 01 May 2006
• Docket Number: No. 05-15076.,05-15076.
• Citation: 447 F.3d 658
• Parties: BP WEST COAST PRODUCTS LLC, a Delaware limited liability company, Plaintiff-Appellee, v. Raymond D. MAY; Sharanjeet K. Ghumman, Defendants-Appellants, and Nandi, Inc.; West Jet, Inc., Defendants.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 658

447 F.3d 658

BP WEST COAST PRODUCTS LLC, a Delaware limited liability company, Plaintiff-Appellee, v. Raymond D. MAY; Sharanjeet K. Ghumman, Defendants-Appellants, and Nandi, Inc.; West Jet, Inc., Defendants.

No. 05-15076.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted December 8, 2005.

Filed May 1, 2006.

COPYRIGHT MATERIAL OMITTED

Gennady L. Lebedev, Esq., Los Angeles, CA, for the appellants.

Jeffrey M. Hamerling, Esq., San Francisco, CA, for the appellee.

Appeal from the United States District Court for the District of Nevada (Reno); Larry R. Hicks, District Judge, Presiding. D.C. No. CV-02-00529-LRH.

Before: PREGERSON, COWEN,^* and THOMAS, Circuit Judges.

COWEN, Circuit Judge:

Raymond May and Sharanjeet Ghumman appeal the order of the district court granting summary judgment in favor of BP West Coast Products LLC ("BPWCP"). The district court concluded that BPWCP did not violate the Petroleum Marketing Practices Act ("PMPA") when it sold its interests in the gas facilities operated by May and Ghumman and nonrenewed its franchise relationships with May and Ghumman. The principal issue on this appeal is whether BPWCP acted in good faith and in the normal course of business when it determined to sell the facilities in compliance with the PMPA. We have jurisdiction pursuant to 28 U.S.C. § 1291 and will affirm.

I.

BPWCP owns the real property and improvements of several ARCO-branded gasoline facilities in the western United States. BPWCP leased some of the facilities to franchisees as lessee dealers. May and Ghumman were lessee dealers who operated gas stations and am/pm Mini Markets pursuant to written franchise agreements with BPWCP.

As lessee operators, they were required to pay monthly rent and royalties on fuel sales. They could not discontinue the ARCO brand at their facilities and had to renew their respective agreements with BPWCP every three years, or risk being discontinued.

Every year BPWCP's Real Estate Manager and Regional Sales Managers evaluate BPWCP's capital investments and the performance of its retail facilities in each of its markets. The managers consider various economic, financial, and competitive factors. The economic factors include sales and growth patterns, and current and future demographics in the markets. The financial factors include the present value of the future estimated income from the facilities, the size of the lots of the facilities, gasoline volume sales, sales from any am/pm Mini Markets located on the facilities, the need to make improvements or upgrades to the facilities, the ability to expand the facilities, and the rate of return on the capital investment in the facilities. The competitive factors include the presence or absence of ARCO-branded and competing stations in the vicinity of the facilities, and regulatory barriers to entry into the markets. In 2001, the managers considered the above factors and recommended to the appropriate decision makers that BPWCP sell all of its interests in the northern Nevada market, including its interests in the facilities owned by May and Ghumman. The recommendation to sell was accepted.

The real estate department arranged for the facilities to be sold through a sealed bid process conducted by a marketing company, the National Real Estate Clearinghouse ("NRC"). The decision to solicit sealed bids in such a situation was unique for BPWCP. Historically, when BPWCP desired to sell property and maintain it as an ARCO-branded facility, it typically negotiated directly with the dealer rather than solicit bids. In this case, however, BPWCP notified May and Ghumman that it was considering recovering its capital investment in their facilities, informed them about the sealed bid process, and encouraged them to participate.

As part of the bidding process, NRC marketed the facilities, educated potential buyers about the process, and prepared written materials and due diligence packages. The bidding materials related that the properties were to be sold as operational ARCO and am/pm sites. The facilities included a mandatory fifteen-year ARCO and am/pm branded franchise agreement with BPWCP. The bidding materials also contained confidential information regarding BPWCP's franchisees' convenience store sales and gasoline volumes. The materials further informed bidders that BPWCP reserved the right to withdraw any property from the sealed bid sale at any time, without notice, in its sole discretion. BPWCP also reserved the right to overlook minor inconsistencies or nonconformance in any bid.

Under the NRC procedure, third parties prequalified before submitting their bids by attending a NRC-conducted bid seminar, and by providing information regarding their credit history and financial resources. The third parties had to make their bids on a preset purchase agreement and include a bid deposit equal to 2.5% of the sale price being offered. Successful bidders had to increase their bid deposit to 10% of the purchase price.

Through the above bidding process, an independent third party, Bechara Victor Honein, offered to purchase May's facility for $1.4 million with a one-percent premium of $14,000 for BPWCP's cost in selling the facility. In making his bid, Honein attributed $850,000 to the goodwill of the business. As to the Ghumman facility, independent third party Badru Khan submitted a bid of $890,000 with an $8,900 premium. In determining his bid, Khan included the value of the "goodwill of an already functioning business along with the existing customer base and income stream, belonging to such business at the time of [his] bid." (ER 1365, ¶ 6.) Neither BPWCP nor NRC had any reason to believe that these third party bidders would withdraw their offers or not close escrow on the facilities.

The third party bidders agreed to enter into a "contract dealer" franchise with BPWCP by signing a fifteen-year fuel supply and am/pm Mini Market agreement with BPWCP, if the deal closed. This contract dealer relationship with the third party bidders differed significantly from the expiring lessee dealer franchise relationship. A contract dealer does not pay rent, pays a lower royalty, and is not limited to the ARCO brand after the initial franchise expires. A contract dealer also must purchase additional equipment and materials, as well as obtain all necessary licenses and permits (including a liquor license and permit to operate the facility as an ARCO-branded facility).

After the bidding had concluded, BPWCP notified May and Ghumman of its decisions to sell their facilities and nonrenew their franchises. The notices cited to PMPA section 2802(b)(3)(D) and explained that BPWCP "ha[d] made a determination in good faith and in the normal course of business to sell the premises upon which [their facilities were] located." (ER 244.) BPWCP further informed May and Ghumman that it would either make them a bona fide offer to purchase their facilities or offer them a right of first refusal ("ROFR") if BPWCP obtained an offer from a third party to purchase their facilities.

On August 8, 2002, BPWCP offered May a ROFR to purchase its interests in his facility for the same $1.4 million purchase price offered by Honein. BPWCP also offered Ghumman a ROFR to purchase its interests in his facility for the same $890,000 offered by Khan. Unlike Honein and Khan, May and Ghumman did not have to pay any premium for buying the facilities. They were also not required to purchase fuel from BPWCP and operate an am/pm Mini Market franchise on the facilities for the next fifteen years. Instead, BPWCP offered them the choice of buying their respective facilities and either (1) entering into the same new contract dealer relationship as Honein and Khan; or (2) continuing to operate under their respective existing franchise agreements until the end of their three-year terms, at which time they could debrand and sell other gasoline, or cease selling gasoline completely.

May and Ghumman obtained appraisals of the "As Is" fair market value of the land, improvements, and BPWCP-owned equipment in their facilities. May's facility was appraised at $1,030,000, rendering BPWCP's ROFR offer 36% in excess of his appraisal. Ghumman's facility was appraised at $410,000, rendering BPWCP's ROFR offer 117% in excess of his appraisal. Both May and Ghumman accepted BPWCP's ROFR offers "under protest" with reservation of all legal rights.

BPWCP filed a complaint with the United States District Court for the District of Nevada seeking a declaratory judgment that it had fully complied with the PMPA when it non-renewed the franchises. May and Ghumman answered the complaint and filed a counterclaim for damages, injunctive relief, and declaratory relief for violations of the PMPA. Following extensive discovery, the district court granted summary judgment to BPWCP.

II.

"The PMPA is intended to protect gas station franchise owners from arbitrary termination or nonrenewal of their franchises with large oil corporations and gasoline distributors, and to remedy the disparity in bargaining power between parties to gasoline franchise contracts." DuFresne's Auto Serv., Inc. v. Shell Oil Co., 992 F.2d 920, 925 (9th Cir.1993). One specific purpose of the PMPA is to protect a franchisee who has built up substantial goodwill in a station from having the franchise arbitrarily taken. See Brach v. Amoco Oil Co., 677 F.2d 1213, 1220 (7th Cir.1982) (citing statement of Rep. Mikva, 123 Cong. Rec. 10,386 (1977)). Despite the protection offered to franchisees, the PMPA was also enacted to provide "`adequate flexibility so that franchisors may initiate changes in their marketing activities to respond to changing market conditions and consumer preferences.'" Unocal Corp. v. Kaabipour, 177 F.3d 755, 762 (9th Cir.1999) (quoting S.Rep. No. 95-731, at 18-19 (1978), as reprinted in 1978 U.S.C.C.A.N. 873, 877).

To achieve these goals, the PMPA "establish[es] `minimum Federal standards...