CEDAR BROOK SERVICE STATION v. CHEVRON USA

• Decision Date: 07 June 1989
• Docket Number: No. CV-86-4240.,CV-86-4240.
• Citation: 746 F. Supp. 268
• Parties: CEDAR BROOK SERVICE STATION, INC., et al., Plaintiffs, v. CHEVRON U.S.A., INC., and Cumberland Farms, Inc., Defendants.
• Court: U.S. District Court — Eastern District of New York

746 F. Supp. 268

CEDAR BROOK SERVICE STATION, INC., et al., Plaintiffs, v. CHEVRON U.S.A., INC., and Cumberland Farms, Inc., Defendants.

No. CV-86-4240.

United States District Court, E.D. New York.

June 7, 1989.

Cohen, Millstein & Hausfeld, Washington, D.C., Arnold P. Azarow, Garden City, N.Y., for plaintiffs.

Dewey, Ballantine, Bushby, Palmer & Wood, New York City, for defendant Cumberland Farms., Inc.

Matthew F. FitzGibbon and Frank M. Ciuffani, Wilentz, Goldman & Spitzer, Woodbridge, N.J., for defendant Chevron, U.S.A., Inc.

COSTANTINO, District Judge.

BACKGROUND

In 1984 Chevron U.S.A. Inc. ("Chevron") acquired the Gulf Corp. ("Gulf"). Under the terms of a consent order between Chevron and the Federal Trade Commission (the "Hold Separate Order"), Chevron was required to operate the Gulf assets separately from its own, exercising no direction or control over them until Chevron divested itself of certain Gulf assets. Prior to the March 13, 1985 termination of the "Hold Separate Order", Chevron was permitted access to Gulf's business records to the extent necessary to complete the required divestitures.

As a result of the Gulf acquisition, Chevron's aggregate debt exceeded $15 billion. To reduce this debt, Chevron initiated market studies to identify which of its assets (either acquired from Gulf or held by Chevron prior to the Gulf purchase) it could most profitably sell.

Upon termination of the "Hold Separate Order" a study team was created within Chevron for the specific task of further evaluating the possible sale of Chevron's Philadelphia refinery and its marketing assets in a number of Northeast and Mid-Atlantic States. The study team solicited bids for these assets, informing the prospective buyers that no decision had been made to sell any particular assets and informing them that authority to approve any sale rested not with the team, but with Chevron's Board of Directors.

On September 20, 1985, Chevron sent prospective purchasers specific bidding instructions and a draft sale agreement. The bidding instructions stated that Chevron could reject any and all bids, and that if Chevron's Board of Directors tentatively decided to accept a bid, final approval would be subject to the negotiation and execution of a binding purchase and sale agreement.

On November 7, 1985, Chevron's Board tentatively accepted a bid from Cumberland Farms, Inc. ("Cumberland") for Chevron's motor fuel marketing assets in the ten Northeast states of Maine, New Hampshire, Vermont, Massachusetts, Connecticut, Rhode Island, New York, Pennsylvania, New Jersey and Delaware. Chevron has retained its Philadelphia refinery and the marketing assets in the mid-atlantic states of Virginia and Maryland, as well as the District of Columbia.

On December 19, 1985, Chevron and Cumberland signed an asset purchase agreement which covered petroleum product distribution terminals, warehouses, office locations, trucks and other vehicles, 494 service station properties and all associated inventories and accounts receivable. In addition, the sale transferred to Cumberland supply contracts with approximately 300 Gulf and Chevron branded "Jobbers" (who maintain storage tanks and trucks for the sale of petroleum products to Gulf and Chevron branded service stations), more than 400 lessee service station dealers and 900 service station dealers who own their own stations.

In structuring the sale, Chevron took numerous steps to minimize disruption to the ongoing Gulf and Chevron dealer operations. These steps included requiring Cumberland, by the terms of the Asset Purchase Agreement, to assume all of Chevron's contractual commitments, including its dealer leases and supply agreements. Further, as franchise agreements came up for renewal, Cumberland was required to offer, in good faith, a new franchise to each dealer on terms and conditions which were not discriminatory.

To ensure that the "Gulf" trademark remained available to Gulf dealers, Chevron granted Cumberland exclusive use of the trademark at Northeast stations for 15½ years with an option to renew indefinitely. Provisions were also made to protect the value of the Gulf and Chevron credit card systems, and Chevron agreed to sell Cumberland virtually the entire gasoline output of its Philadelphia refinery.

On November 8, 1985, Chevron notified all Gulf and Chevron dealers in the Northeast that it was entering final sale negotiations with Cumberland.

On February 14, 1986, Chevron notified all Gulf and Chevron dealers affected by the sale that it would not renew their franchises, but had assigned its rights and delegated its duties to Cumberland, which would honor the provisions of all agreements and offer nondiscriminatory franchise renewal agreements upon expiration of each dealer's current agreements with Chevron. The sale closed on May 31, 1986.

Plaintiffs, 11 service station dealers in New York, were leasing their stations from defendant Chevron at the time of the sale to defendant Cumberland. Each plaintiff also purchased its gasoline from Chevron under product supply agreements for resale under the Gulf trademark.

Plaintiffs claim that the Northeast sale violated the Petroleum Marketing Practices Act, 15 U.S.C. § 2801 et seq. (1982) (PMPA) as well as New York law, and seek to have the sale set aside and be afforded the chance to purchase from Chevron the stations they were leasing under their franchise agreements.

The PMPA was enacted to protect dealers, who are generally small business persons, from arbitrary termination or non-renewal of their franchise relationships with powerful refiners. Senate Report No. 95-731, 95th Cong., 2d Sess. (1978), U.S.Code Cong. & Admin.News 1978, 873 defines the term franchise as a "motor fuel trademark license." It further provides that "secondary arrangements, such as leases of real property or motor fuel supply agreements, are incorporated in the definition of a franchise so that the Act may not be circumvented by a termination or non-renewal of the real estate lease or motor fuel supply agreement which thereby renders the trademark license valueless." Id. at 29, U.S.Code Cong. & Admin.News 1978, at 888.

Thus, to achieve its protective function, the PMPA "prohibits a franchisor from terminating a franchise during the term of the franchise agreement and from failing to renew the relationship at the expiration of the franchise term, unless the termination or non-renewal is based upon a ground specified or described in the legislation...." Id. at 15, U.S.Code Cong. & Admin.News 1978, at 874. Section 2805(c) of the PMPA provides that "in any action ... the franchisee shall have the burden of proving the termination of the franchise or the non-renewal of the franchise relationship."

Plaintiffs claim that the Northeast transaction resulted in non-renewal of their franchises under the PMPA as a matter of law, and that defendants are collaterally estopped from claiming otherwise by Florham Park Chevron, Inc. v. Chevron, 2 Bus. Franchise Guide (CCH) ¶ 9011, 1987 WL 17496 (D.N.J.1987) (Florham Park I). Defendants have filed a motion for summary judgment, arguing that the PMPA expressly permits assignments of franchise agreements from one franchisor to another which, if valid under state law, do not invoke the PMPA at all. Because the assignments of plaintiffs' franchise agreements were valid under New York law, defendants contend, no termination or non-renewal occurred and no cause of action under the PMPA arose.

Defendants also claim that even if they did trigger the PMPA by their transaction, they fully complied with the affirmative defense set forth in § 2802(b)(2)(E) of the PMPA, which permits termination or non-renewal of a franchise relationship where a franchisor withdraws from a marketing area if certain conditions are met.¹ Plaintiffs take issue with numerous aspects of defendants' claim that the terms of § 2802(b)(2) were met. Initially, they argue that factual issues, unsuitable for disposition on summary judgment exist regarding Chevron's "good faith determination" to withdraw from the Northeast.

Second, plaintiffs claim that there occurred no "changes in relevant facts and circumstances" to justify the decision to withdraw.

Third, plaintiffs contend that the issue of Cumberland's good faith in offering non-discriminatory renewal franchises is inappropriate for summary judgment and that defendants are collaterally estopped by Florham Park Chevron, Inc. v. Chevron, 2 Bus. Franchise Guide (CCH) ¶ 9012, 1984 WL 19492 (D.N.J.1987) (Florham Park II) from arguing to the contrary. Even if defendants are not estopped, say plaintiffs, factual issues exist regarding Cumberland's good faith that require consideration by a jury.

Fourth, plaintiffs note, and defendants agree, that Cumberland was not a "franchisor" at the time of the sale. Plaintiffs claim this fact made it impossible — at least as to the first dealer whose franchise with Chevron expired following the sale — for Cumberland to satisfy the requirement of § 2802(b)(2)(E)(iii)(II) that it offer the franchisees new franchises "which are not discriminatory to the franchisees as compared to franchises then currently being offered" or "then in effect and with respect to which such other person is the franchisor."

Defendants argue that the PMPA does not mandate that only existing franchisors may purchase the interests of a withdrawing franchisor. To hold that it did amount to a restraint of trade which would stratify the market place and limit the flexibility of withdrawing franchisors in contravention of congressional intent. Finally, plaintiffs' claim that defendant, Cumberland Farms violated § 199-b of the NYS GBL by failing to make disclosures required there under. Cumberland claims that all disclosures were either made or unnecessary.

DISCUSSION

A. Did the Northeast transaction invoke the PMPA?

Defendants argue that they are entitled to summary judgment because the sale of...