Lugar v. Texaco, Inc., 84-3197

• Decision Date: 14 February 1985
• Docket Number: No. 84-3197,84-3197
• Citation: 755 F.2d 53
• Parties: , 1985-1 Trade Cases 66,430 Howard LUGAR v. TEXACO, INC., Appellant.
• Court: U.S. Court of Appeals — Third Circuit

Page 53

755 F.2d 53

53 USLW 2439, 1985-1 Trade Cases 66,430

Howard LUGAR v. TEXACO, INC., Appellant.

No. 84-3197.

United States Court of Appeals, Third Circuit.

Argued Oct. 30, 1984.

Decided Feb. 14, 1985.

George E. Mittelholzer (argued), Cherry Hill, N.J., Melvin L. Moser, Jr., Buchanan & Ingersoll, P.C., Pittsburgh, Pa., for appellant.

Daniel J. Beggy (argued), Mansmann, Beggy & Campbell, Pittsburgh, Pa., for appellee.

Before GARTH and SLOVITER, Circuit Judges, and LORD, District Judge. ^*

OPINION OF THE COURT

SLOVITER, Circuit Judge.

I.

This case addresses, for the first time, whether an oil company which supplies fuel to its franchised dealers is obliged, before failing to renew the franchise, to offer to assign to the dealer an option to purchase the premises under Title I of the Petroleum Marketing Practices Act (PMPA), 15 U.S.C. Secs. 2801-2806 (1982).

Howard Lugar, the plaintiff below, operated a service station in Monroeville, Pennsylvania, pursuant to an agreement with Texaco, Inc. The property on which Lugar's Texaco station was located had been leased to Texaco in 1966 by Anna Wukich, the owner. The lease provided for an initial term which expired on May 31, 1981, but Texaco could renew the lease for three additional five-year terms. The lease also gave Texaco an option to purchase the property for $125,000 at any time after the tenth year of the lease. Texaco in turn subleased the property to Lugar. The sublease also expired on May 31, 1981.

Although the district court made no findings on this issue, the parties agree that Texaco decided to cease supplying its branded products directly to service stations in western Pennsylvania and to market them instead through distributors. To implement this decision, Texaco sought to divest itself of its direct obligations to retailers, including those to Lugar. Texaco advised Lugar in January 1981, confirmed by letter on February 20, 1981, that it would not renew the lease and sales agreement between them. On February 8, 1981, Lugar's attorney sent a letter to Texaco requesting that the purchase option in the Wukich to Texaco lease be assigned to Lugar. Texaco never responded to this request.

On May 31, 1981, both the lease and the sublease expired. Lugar took with him all his tools and equipment and Texaco, pursuant to its rights under the lease, razed the building and relinquished all interest in the property. Thereafter, Lugar filed the present action alleging that Texaco had violated the PMPA.

II.

Congress enacted the PMPA in June 1978 after considerable debate and extensive inquiry into alleged unfair treatment of fuel dealers by their suppliers. Title I of the Act was designed to strengthen the position of the franchisees in bargaining with their franchisors. S.Rep. No. 731, 95th Cong., 2d Sess. 1, 18-19 reprinted in 1978 U.S.Code Cong. & Ad.News 873, 876-77 (hereafter Senate Report). Congress focused on two areas of particular concern to service station operators: nonrenewal of the franchise or its arbitrary termination. The Act provides that a franchisor may terminate or fail to renew a franchise only for the reasons provided in the statute and by giving the requisite notice, Sec. 102(a), 15 U.S.C. Sec. 2802(a) (1982). The permissible grounds are set forth in two sections of the Act, sections 102(b)(2) and 102(b)(3), 15 U.S.C. Secs. 2802(b)(2), 2802(b)(3).

Five grounds are listed in section 102(b)(2) of the PMPA as valid bases for either termination or nonrenewal. They are: (A) the failure of the franchisee to comply with reasonable and material provisions of the franchise, 15 U.S.C. Sec. 2802(b)(2)(A); (B) the failure of the franchisee to make good faith efforts to carry out the provisions of the franchise, 15 U.S.C. Sec. 2802(b)(2)(B); (C) the ocurrence of an event which is relevant to the franchise relationship and which makes termination or nonrenewal reasonable, 15 U.S.C. Sec. 2802(b)(2)(C); (D) the termination or nonrenewal by written agreement, 15 U.S.C. Sec. 2802(b)(2)(D); and (E) a determination by the franchisor made "in good faith and in the normal course of business" to withdraw from the relevant geographic marketing area, 15 U.S.C. Sec. 2802(b)(2)(E).

The succeeding section 102(b)(3) sets forth additional grounds which may form the basis for nonrenewal, but not for termination. These include (A) failure of the parties to agree to changes in the franchise arrangement "made by the franchisor in good faith and in the normal course of business," 15 U.S.C. Sec. 2802(b)(3)(A); (B) receipt by the franchisor of numerous bona fide complaints from customers regarding the franchisee's operations, 15 U.S.C. Sec. 2802(b)(3)(B); (C) the franchisee's failure to operate the premises in a clean, safe, and healthful manner; and, finally, (D) the franchisor's determination "in good faith and in the normal course of business" to convert the premises to another use, to alter, add to or replace them, or to sell the premises, or its determination that renewal of the franchise relationship is likely to be uneconomical to the franchisor despite reasonable additions to the agreement, 15 U.S.C. Sec. 2802(b)(3)(D).

A franchisor who relies on the grounds set forth in Sec. 2802(b)(2)(E) or Sec. 2802(b)(3)(D) for nonrenewal must first, if it leases the marketing premises, have made "a bona fide offer to sell, transfer, or assign to the franchisee such franchisor's interests in such premises," or have offered the franchisee a right of first refusal. 15 U.S.C. Secs. 2802(b)(2)(E)(iii)(I), 2802(b)(3)(D)(iii). See Roberts v. Amoco Oil Co., 740 F.2d 602, 605-06 (8th Cir.1984).

In his complaint Lugar alleged that Texaco was required to assign the purchase option to him pursuant to the provision in 15 U.S.C. Sec. 2802(b)(3)(D)(iii). However, this section imposes obligations on a franchisor only if it seeks to justify nonrenewal of the franchise arrangement on the basis of its determination as set forth in that section. As the district court recognized, Texaco made no such determination. Therefore, the court held 15 U.S.C. Sec. 2802(b)(3)(D) inapplicable, and Lugar has not appealed this ruling.

Texaco moved for summary judgment, claiming that it had a statutory right not to renew Lugar's franchise because 15 U.S.C. Sec. 2802(b)(2)(C) permits the franchisor not to renew a franchise if an event occurs that makes nonrenewal "reasonable", and 15 U.S.C. Sec. 2802(c)(4) gives as an example of such an event "the expiration of an underlying lease." Since the Wukich lease to Texaco expired on May 31, 1981, it argued it was entitled to judgment as a matter of law.

The district court entered summary judgment sua sponte against Texaco and for Lugar. The court held that Texaco could not claim the protection of Sec. 2802(b)(2)(C) because its failure to assign the purchase option to Lugar was unreasonable. ¹ Thereafter, the issue of damages was submitted to a jury which awarded damages of $47,000.

Texaco now challenges both the holding of liability and the facts and theories on the basis of which damages were awarded. Because we reverse on the issue of liability, we have no occasion to consider the damages issues.

III.

Under the PMPA, it is the franchisor's "burden of going forward with evidence to establish as an affirmative defense that such termination or nonrenewal was permitted...." Sec. 105(c), 15 U.S.C. Sec. 2805(c) (1982). The text of the provision upon which Texaco relies in order to justify its failure to renew Lugar's franchise states that if the proper notice has been given, "the following are grounds for ... nonrenewal of a franchise relationship:"

(C) The occurrence of an event which is relevant to the franchise relationship and as a result of which ... nonrenewal of the franchise relationship is reasonable, if such event occurs during the period the franchise is in effect....

Sec. 102(b)(2)(C), 15 U.S.C. Sec. 2802(b)(2)(C).

Lugar makes no complaint about the manner or timing of his notification; rather, he insists that no event occurred that made nonrenewal "reasonable". Congress provided an illustrative but non-exclusive list of such "events" in 15 U.S.C. Sec. 2802(c). The illustration on which Texaco relies is:

(4) loss of the franchisor's right to grant possession of the leased marketing premises through expiration of an underlying lease, [provided the requisite notice is given].

Looking only at the language of the statute, it is plausible to argue that the franchisor's voluntary relinquishment of a lease does not constitute a permissible "event". However, the legislative history shows otherwise. According to the Senate Report,

Expiration of the underlying lease could occur under a variety of circumstances including, for example, a decision by the franchisor not to exercise an option to renew the underlying lease. However, it is not intended that termination or non-renewal should be permitted based upon the expiration of a lease which does not evidence the existence of an arms length relationship between the parties and as a result of the expiration of which no substantive change in control of the premises results.

Senate Report at 38, 1978 U.S.Code Cong. & Ad.News at 896 (emphasis added).

Consequently, every court that has had occasion to address this issue has held that the presence of an option to renew the underlying lease does not change the result. See, e.g., Bernardini v. Exxon Corp., 1981-1 Trade Cas. (CCH) p 63,921 at 75,772-73 (E.D.Pa.1981); Gaspar v. Chevron Oil Co., 490 F.Supp. 971, 974 (D.N.J.1980); Sachi v. Mobil Oil Corp., 1980-1 Trade Cas. (CCH) p 63,044 at 77,194-95 (E.D.N.Y.1979). See generally Finch, Judicial Interpretation of the Petroleum Marketing Practices Act: Strict Construction of Remedial Legislation, 37 Bus.Law. 141, 155-160 (1981). Moreover, the First Circuit has held that even where the franchisor took affirmative action not to extend a lease that would otherwise have renewed automatically, there was no violation...