Casserlie v. Shell Oil Co.

• Decision Date: 06 January 2009
• Docket Number: No. 2007-1408.,2007-1408.
• Citation: 2009 Ohio 3,902 N.E.2d 1,121 Ohio St.3d 55
• Parties: CASSERLIE et al., Appellants, v. SHELL OIL COMPANY et al., Appellees.
• Court: Ohio Supreme Court

902 N.E.2d 1

121 Ohio St.3d 55

2009-Ohio-3

CASSERLIE et al., Appellants, v. SHELL OIL COMPANY et al., Appellees.

No. 2007-1408.

Supreme Court of Ohio.

Submitted May 20, 2008.

Decided January 6, 2009.

Robert E. Sweeney Co., L.P.A., Bernard Goldfarb, and Sean S. Kelly; and O'Quinn Law Firm and Anthony E. Farah, for appellants.

Baker & Hostetler, L.L.P., Thomas R. Lucchesi, and Lora M. Reece; and Baker Botts, L.L.P., Thomas R. Phillips, and David M. Rodi, for appellees.

MOYER, C.J.

I

{¶ 1} Appellants' proposition of law proposes that "[t]he definition of Good Faith under the [Uniform Commercial Code] incorporating an `honesty in fact' component requires a subjective inquiry." We disagree and affirm the judgment of the court of appeals.

II

{¶ 2} Appellants, Donald Casserlie and others, are a group of independent Shell lessee-dealers in the greater Cleveland area (collectively, "the dealers"). The appellees in this case are Shell Oil Company, its partners, and its successors (collectively, "Shell"), who at various times between 1995 and the time the complaint was filed sold Shell-branded gasoline to the dealers in the greater Cleveland area. The dealers leased gas stations, including equipment and land, from Shell and operated them as franchisees. The parties' contracts obligated the dealers to buy gasoline only from Shell at a wholesale price set by Shell at the time of delivery. This type of term in a contract is known as an open-price term.

{¶ 3} The price paid by the dealers is referred to as the dealer-tank-wagon ("DTW") price because it includes the cost of delivery to the stations. Shell charged the dealers a DTW price that was based on market factors including the prices offered by its major competitor, British Petroleum ("BP"), and the street price within areas of Cleveland. In each area of the city, called a price administration district ("PAD"), Shell charged all dealers the same DTW price.

{¶ 4} In 1998, Shell, Texaco, and Saudi Aramco formed Equilon Enterprises, L.L.C.; Shell's agreements with service stations in Cleveland were assigned to Equilon. In November 1999, Equilon and appellee Lyden Company entered into a joint venture called True North Energy, L.L.C. True North became the distributor of Shell-branded gasoline in the Cleveland area, including to the stations operated by the dealers. True North set the DTW price as the wholesale price it had paid Equilon for gasoline plus six or seven cents per gallon.

{¶ 5} Shell also sold gasoline to "jobbers," which were independent companies operating non-Shell-owned gas stations. Jobbers purchased gasoline directly at the oil company's terminal and paid the "rack" price, which was the cost of purchasing gasoline at the oil company's terminal and thus did not include delivery costs.

{¶ 6} In 1999, the dealers filed suit against Shell, alleging, among other claims, that Shell had engaged in bad faith when it set the DTW price. The dealers alleged that the rack price was often substantially lower than the DTW price. This allowed jobbers, including Lyden Company, to offer wholesale DTW prices that were substantially lower than the DTW price charged to the dealers. The dealers contend that this pricing is unreasonable and is part of a marketing plan proposed by Shell that was designed to drive them out of business. The dealers assert that Shell's goal was to eliminate them so that Shell could take over operation of the gas stations, thus profiting from all of the sales, including nonfuel sales, at the stations, and not just from wholesale gasoline sales to and rental income from the dealers.

{¶ 7} The parties agreed to bifurcate the proceedings and move forward only on the bad-faith claim. On April 13, 2005, the trial court granted summary judgment for Shell. The court found that Shell did not violate R.C. 1302.18, which codifies Uniform Commercial Code ("UCC") section 2-305 and requires a price to be fixed in good faith, when it set the DTW price and that the dealers had not proven that the price had been set in a commercially unreasonable manner.

{¶ 8} The dealers appealed, arguing that bad faith may be shown either by evidence of a party's intent, a subjective standard, or by evidence of its commercial unreasonableness, which is an objective standard. The court of appeals affirmed the trial court's ruling and adopted an objective standard based on Tom-Lin Ents. v. Sunoco, Inc. (R & M) (C.A.6, 2003), 349 F.3d 277. The court determined that the dealers failed to show that Shell's prices were not commercially reasonable. The cause is before this court upon our acceptance of a discretionary appeal.

III

{¶ 9} As a preliminary matter, we review de novo the granting of summary judgment. Comer v. Risko, 106 Ohio St.3d 185, 2005-Ohio-4559, 833 N.E.2d 712, ¶ 8.

{¶ 10} The parties agree that Shell has authority pursuant to the dealer agreements to set the price of gasoline at the time of delivery. They agree that the price must be set subject to R.C. 1302.18, which requires the price to be "reasonable." R.C. 1302.18(A). Pursuant to R.C. 1302.18(B) (UCC section 2-305(2)), the price must be set "in good faith." "Good faith" is defined generally as "honesty in fact in the conduct or transaction concerned," R.C. 1301.01(S), but in the case of a merchant, "`good faith' * * * means honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade." R.C. 1302.01(A)(2). It is undisputed that Shell is a "merchant," as defined in R.C. 1302.01(A)(5).

{¶ 11} Shell argues that good faith requires an objective inquiry and is demonstrated when a seller's price is within the range of its competitors and the seller has not discriminated between similarly situated buyers. Shell also contends that "an inquiry into the seller's subjective intent is neither permitted nor required." The dealers argue that good faith requires a subjective inquiry and ask, "[H]ow can an open price, specifically calculated to drive a contractual partner out of business, be a `good faith' price."

{¶ 12} The trial court and court of appeals agreed with Shell, relying on Tom-Lin Ents., 349 F.3d 277. In Tom-Lin, the court confronted an agreement nearly identical to the one between the dealers and Shell and concluded, applying Ohio law, that an inquiry into good faith required "an objective analysis of the merchant-seller's conduct." (Emphasis sic and footnote omitted.) Id. at 281-282. Thus, neither the trial court nor the court of appeals considered whether an examination into "good faith" required a subjective inquiry, and neither court engaged in a subjective inquiry.

{¶ 13} It is not disputed that the latter half of the definition of good faith, "the observance of reasonable commercial standards of fair dealing in the trade," requires only an objective analysis. The issue before us is whether there is room for a subjective inquiry within the honesty-in-fact analysis in these circumstances.

{¶ 14} The UCC does not define the term "honesty in fact." It should also be noted that "[c]ourts and commentators have recognized that the meaning of `good faith' is not uniform throughout the [UCC]." Mathis v. Exxon Corp. (C.A.5, 2002), 302 F.3d 448, 456. See also Martin Marietta Corp. v. New Jersey Natl. Bank (C.A.3, 1979), 612 F.2d 745, 751 (noting that good faith is considered subjective in Article 1 but objective in Article 2). Thus, case law defining good faith in other areas of the UCC, such as the Article 1 covenant of good faith and fair dealing, is of somewhat limited value here. Non-UCC cases defining good faith are of even less relevance.

{¶ 15} Official Comment 3 to UCC section 2-305 does provide some guidance. That comment provides, in full:

{¶ 16} "[UCC section 2-305(2)], dealing with the situation where the price is to be fixed by one party rejects the uncommercial idea that an agreement that the seller may fix the price means that he may fix any price he may wish by the express qualification that the price so fixed must be fixed in good faith. Good faith includes observance of reasonable commercial standards of fair dealing in the trade if the party is a merchant. (Section 2-103 [R.C. 1302.01]). But in the normal case a `posted price' or a future seller's or buyer's `given price,' `price in effect,' `market price,' or the like satisfies the good faith requirement."

{¶ 17} Comment 3 explains that the purpose of R.C. 1302.18(B) is to restrict the price a seller or buyer may set when the contract price has been left open, by requiring the price to be fixed in good faith. The second sentence of the comment does not remove honesty in fact from the definition of good faith in this context, because it uses the nonexclusive term "includes." The last sentence, however, is not limited to part of the good-faith definition but rather provides a safe harbor where a "posted price" satisfies good faith in its entirety.

{¶ 18} A number of cases from other jurisdictions considering open-price terms have relied on the posted-price comment.¹ This court has noted in the past that "it is desirable to conform our interpretations of the Uniform Commercial Code to those of our sister states." Edward A. Kemmler Mem. Found. v. 691/733 E. Dublin-Granville Rd. Co. (1992), 62 Ohio St.3d 494, 499, 584 N.E.2d 695. Relying on the Official Comments to the UCC helps to achieve this uniformity, as does reviewing case law that has previously interpreted particular provisions.

{¶ 19} The Supreme Court of Texas addressed the very issue before us here in an essentially identical fact pattern in Shell Oil Co. v. HRN, Inc. (Tex.2004), 144 S.W.3d 429. Independent gasoline dealers brought suit against Shell, alleging that the prices were not set in good faith under UCC section 2-305(2) because Shell had set the prices intending to put them out of business. 144 S.W.3d at 431-432. The court held that Shell did not violate its duty of good faith, because the posted price was both...