Esso Standard Oil Co. v. Department of Consumer Affairs, 85-1879

• Citation: 793 F.2d 431
• Decision Date: 19 June 1986
• Docket Number: No. 85-1879,85-1879
• Parties: ESSO STANDARD OIL COMPANY, et al., Plaintiffs, Appellants, v. DEPARTMENT OF CONSUMER AFFAIRS, et al., Defendants, Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (1st Circuit)

Page 431

793 F.2d 431

ESSO STANDARD OIL COMPANY, et al., Plaintiffs, Appellants, v. DEPARTMENT OF CONSUMER AFFAIRS, et al., Defendants, Appellees.

No. 85-1879.

United States Court of Appeals First Circuit.

Argued April 11, 1986.

Decided June 19, 1986.

Jose R. Gonzalez-Irizarry with whom Arturo J. Garcia-Sola, McConnell Valdes Kelley Sifre Griggs & Ruiz-Suria and Otto Bustelo-Garriga, Hato Rey, P.R., were on brief, for plaintiffs, appellants.

Reina Colon De Rodriguez, Acting Deputy Sol. Gen., Dept. of Justice, with whom Rafael Ortiz Carrion, Sol. Gen., Hato Rey, P.R., was on brief, for defendants, appellees.

Maximiliano Trujillo-Gonzalez, Hato Rey, P.R., on brief, for Asociacion De Detallistas De Gasolina De Puerto Rico, Inc., amicus curiae.

Before CAMPBELL, Chief Judge, COFFIN, Circuit Judge, and YOUNG, ^* District Judge.

COFFIN, Circuit Judge.

Plaintiffs-appellants, five oil companies engaged in the distribution of gasoline and other petroleum products in the Commonwealth of Puerto Rico, ¹ challenge the validity of a Commonwealth regulation controlling the rents that may be charged to gasoline filling stations. Appellants claim that the regulation is preempted by the Petroleum Marketing Practices Act (PMPA), 15 U.S.C. Sec. 2801, et seq. The District Court of Puerto Rico concluded that the PMPA does not preempt the Commonwealth's rent-control regulation, 622 F.Supp. 540. We affirm.

I. The Petroleum Marketing Practices Act

The PMPA was enacted by Congress in 1978 to protect gasoline franchisees from arbitrary or discriminatory termination or nonrenewal of their franchises. S.Rep. No. 95-731, 95th Cong., 2d Sess. 15, reprinted in 1978 U.S.Code Cong. & Ad.News 873. Congress noted that the disparity of bargaining power existing between franchisors and franchisees sometimes resulted in franchise agreements that amounted to contracts of adhesion. Id. at 876. A number of states had already enacted legislation to address the petroleum franchise problem, and Congress sought to establish a "single, uniform set of rules" to govern the grounds for the termination or nonrenewal of franchises. Id. at 877.

Title I of the PMPA prohibits termination or nonrenewal of any franchise relationship except on the basis of specifically enumerated grounds and upon compliance with certain notification requirements. 15 U.S.C. Secs. 2802-04. One of the acceptable grounds for nonrenewal, relevant to this case, is failure by the franchisee and franchisor to agree on changes to the franchise. The changes must be "the result of determinations made by the franchisor in good faith and in the normal course of business", and must not be made solely for the purpose of forcing the nonrenewal of the franchise. 15 U.S.C. Sec. 2802(b)(3)(A). Congress specifically decided that the test should be whether the franchisor had acted in subjective "good faith" in requesting the changes, and not whether the demanded changes were the result of "reasonable business judgments" on the part of the franchisor. 1978 U.S.Code Cong. & Ad.News at 895-96. As the Senate Report to the bill explained, "[t]hese tests provide adequate protection of franchisees from arbitrary or discriminatory termination or nonrenewal, yet avoid judicial scrutiny of the business judgment itself." Id. at 896. See also Palmieri v. Mobil Oil Corp., 529 F.Supp. 506, 509-11 (D.Conn.1982) (discussing legislative history of PMPA), aff'd, 682 F.2d 295 (2d Cir.1982); Munno v. Amoco Oil Co., 488 F.Supp. 1114, 1118-20 (D.Conn.1980) (same).

Because the "good faith" requirement requires merely that a franchisor not act "with evil motive or discriminate[ ] selectively against franchisees", Palmieri, 529 F.Supp. at 511, courts have upheld franchisor demands for rent increases ranging from 100% to 300% when those demands were made in accord with established rental formulas applied to all franchisees and not for the purpose of selectively terminating a particular franchisee. See Palmieri, 529 F.Supp. at 509-11; Munno, 488 F.Supp. at 1118-20; Bellmore v. Mobil Oil Co., 524 F.Supp. 850, 853-54 (D.Conn.1981); Ferriola v. Gulf Oil Corp., 496 F.Supp. 158, 162-63 (E.D.Penn.1980); Pearman v. Texaco, 480 F.Supp. 767, 772 (W.D.Mo.1979); Kesselman v. Gulf Oil Corp., 479 F.Supp. 800, 803-04 (E.D.Pa.1979). The courts noted that the PMPA gave the franchisees no cause of action even when such radical increases in rent appeared objectively or commercially unreasonable. Bellmore, 524 F.Supp. at 853-54; Ferriola, 496 F.Supp. at 162-63; Pearman, 480 F.Supp. at 772. As one court pointed out, the demands of the marketplace and a franchisor's economic incentive to limit franchise turnover should encourage franchisors to offer reasonable franchise agreements. Palmieri, 529 F.Supp. at 511. If abuses in franchise demands continued, the court commented, "the legislature may decide to regulate the franchise relationship more closely, but the PMPA as enacted does not vest the courts with authority to review the objective reasonableness ... of each franchise agreement." Id.

II. The Rent Control Regulation

In contrast to the PMPA, the rent control regulation enacted by the Commonwealth of Puerto Rico does seek to regulate a substantive element of the franchise agreement. In March 1981, the Department of Consumer Affairs (DOCA) of the Commonwealth of Puerto Rico promulgated "Regulations to Determine the Rent to be Paid by Gasoline Filling Stations" (Regulation 2758). Section 5 of the Regulation states that the rental rate of a retail gasoline filling station "shall be established by agreement between the lessor and the lessee", taking into account seven listed criteria including the amount of the investment made by the lessor, the market value of the property, the former rental rate, and the net income derived by the lessee. Section 6 of the Regulation provides that if the parties, "after negotiation, are unable to reach an agreement regarding the amount of rent, either of them may file a petition in the Department [DOCA] ... for the determination and fixing of the rent." Under Section 7 of the Regulation, DOCA sets a rent based on a formula with a number of variables. This rent stays in effect for four years, unless either party files a petition for a redetermination of the rent because of a substantial change in any of the elements that comprise the established formula. Regulation 2758, Section 9. Regardless of whether the rent is set by agreement between the parties or by DOCA, the rental rate may never exceed ten percent of the market value of the leased filling station. Regulation 2758, Section 10.

If rent negotiations between a franchisor and franchisee fail, and the franchisee petitions DOCA to set a rental rate, the franchisor can choose to terminate the franchise as long as the requirements of the PMPA are met. Thus, if the original rent increase sought by the franchisor had been made in "good faith" and "in the ordinary course of business", and the franchisee had refused to agree to the new rate and had instead petitioned DOCA, the franchisor may terminate or not renew the franchise regardless of the objective unreasonableness of its original rental demand. As DOCA made clear in its brief and at oral argument, any rent proceedings pending before DOCA would be moot once a franchise had been properly terminated under the PMPA, and such proceedings would come to a halt. The franchisor would then be free to negotiate with a different franchisee. That franchisee could also petition DOCA for a rental rate, but then clearly would face the possibility of not receiving the franchise. Alternatively, the franchisee could choose to accept the rent requested by the franchisor, even if such rent is higher than the rate DOCA would have fixed. ² In no case, however, could the rental rate exceed ten percent of the market value of the filling station.

III. Preemption

The oil companies argue that the PMPA preempts Regulation 2758 because the PMPA expressly gives companies the right to demand any rent they wish as a predicate for renewal or continuation of a franchise within the very limited constraints of "good faith" and "in the ordinary course of business." In contrast, they argue, Regulation 2758 effectively restricts the maximum rents that franchisors can charge. The companies point out that Congress, in passing the PMPA, sought to strike a balance between the competing interests of the franchisors and franchisees, and they contend that Regulation 2758 impermissibly skews that balance in favor of franchisees.

The primary objective of the PMPA was to protect franchisees from arbitrary and discriminatory terminations. 1978 U.S.Code Cong. & Ad.News at 873-77. Nevertheless, there is no doubt that Congress was also concerned with retaining some flexibility for franchisors. As the Senate Report accompanying the bill pointed out: "Legislation in this subject area requires recognition of the legitimate needs of a franchisor to be able to terminate a franchise or not renew a franchise relationship based upon certain actions of the franchisee, including certain failures to comply with contractual obligations or upon certain changes in circumstances." 1978 U.S.Code Cong. & Ad.News at 877. Thus, in the specific area of termination and nonrenewal, Congress struck a balance between franchisors and franchisees: franchisors could not terminate or refuse to renew a particular franchise on a discriminatory basis, but franchisors could demand across-the-board changes from their franchisees without being subjected to judicial evaluation of whether those changes were the result of "reasonable business judgments".

The question presented by this case is whether the balance struck by the PMPA in the area of termination and nonrenewal also impliedly gives franchisors a substantive right to be free of state regulation of all elements of the franchise agreement. We do not believe it gives such protection. In the PMPA, Congress expressly set out...