Remus v. Amoco Oil Co.

• Decision Date: 03 July 1986
• Docket Number: No. 85-2210,85-2210
• Citation: 794 F.2d 1238
• Parties: Ralph REMUS and Ralph's Standard, Inc., individually and on behalf of a class of persons similarly situated, Plaintiffs-Appellants, v. AMOCO OIL COMPANY, Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1238

794 F.2d 1238

Ralph REMUS and Ralph's Standard, Inc., individually and on behalf of a class of persons similarly situated, Plaintiffs-Appellants, v. AMOCO OIL COMPANY, Defendant-Appellee.

No. 85-2210.

United States Court of Appeals, Seventh Circuit.

Argued Feb. 25, 1986.

Decided July 3, 1986.

George P. Kersten, Kersten & McKinnon, Milwaukee, Wis., for plaintiffs-appellants.

Frank Cicero, Jr., Richard C. Godfrey, Kirkland & Ellis, Chicago, Ill., Stuart Parsons, Quarles & Brady, Milwaukee, Wis., for defendant-appellee.

Before BAUER and POSNER, Circuit Judges, and MOODY, District Judge. ^*

POSNER, Circuit Judge.

The plaintiff, Remus, a franchised Amoco gasoline dealer in Wisconsin, brought this diversity suit against Amoco on his own behalf and that of similarly situated dealers. The suit charges Amoco with having violated the Wisconsin Fair Dealership Law, Wis.Stat. Sec. 135.01 et seq., as well as common law fraud and contract principles, by adopting a "discount for cash" program. The district judge granted Amoco's motion for summary judgment and dismissed the case, 611 F.Supp. 885 (E.D.Wis.1985), and Remus has appealed, presenting novel and important questions under the Fair Dealership Law that we must try to answer as best we can from the words of the statute--for there is no pertinent legislative history, no similarly worded statute in another state, and no decision by a Wisconsin court interpreting the statute in any respect pertinent to this case.

Amoco like other major gasoline suppliers offers customers a credit card, free of charge, that they can use to buy gas and other products from Amoco's franchised dealers, such as Remus. Before the adoption of the discount for cash program in 1982, Amoco had not charged dealers separately for the cost of the credit card system, which is considerable ($150 million in 1981). One cost is the time value of money--the owner of the credit card pays no interest if he pays his bill within a specified period. There are also collection and other administrative costs. All the costs were built into the wholesale price of Amoco's gasoline, that is, the price that Amoco charged the dealers, and that the dealers passed on to their customers. The result was that a customer who paid cash was paying a part of the costs of the credit card system even though he was not receiving any of its benefits. A system under which one group of customers subsidizes another ("cross-subsidization") is difficult to sustain under competition, because the customers who are charged the higher prices to subsidize the customers who are charged the lower prices are an inviting target for new competitors, who can easily "cream skim" by offering modest discounts to the higher-paying customers. See, e.g., Illinois v. ICC, 722 F.2d 1341, 1347 (7th Cir.1983). That is what happened here: dealers in other brands of gasolines offered a discount for cash and siphoned cash customers away from Amoco dealers.

To stem the flow Amoco decided to unbundle its cash and credit sales. The unbundling had two components. One was to reduce Amoco's wholesale price by an amount equal to the average cost of its credit card system. That is, Amoco removed the cost of that system from the gasoline price. The reduction in price was about 2.8 percent, later reduced to 2.1 percent. Amoco offered inducements to get the dealers to pass on the reduction to consumers; this was the "discount for cash" program. The other component of the unbundling was the imposition by Amoco on its dealers of a charge for credit card sales. The charge was 4 percent (reduced to 3 percent when the discount in the wholesale price was reduced to 2.1 percent) of the dealer's revenue from credit card sales. Thus, instead of reimbursing the dealer dollar for dollar for credit card sales made by the dealer to his customers, Amoco would now reimburse him only 96cents (later raised to 97cents). Why was the charge for credit card sales a higher percentage of the wholesale gasoline price than the reduction in the price from unbundling--4 percent (reduced to 3 percent) versus 2.8 percent (reduced to 2.1 percent)? Because not all sales are made on credit. For example, if half were made on credit, a 4 percent charge on credit card sales would be needed to offset completely a 2 percent reduction in the wholesale price of gasoline. The idea behind the unbundling was not to change Amoco's revenues (in the short run) but merely to shift the entire cost of the credit card program onto the shoulders of the credit card customers. If a dealer who had half cash and half credit card customers reduced his price to his cash customers by 2 percent and raised his price to his credit card customers by 2 percent, this would produce a 4 percent spread between the cash price and the credit card price, a spread equal to Amoco's credit card charge. If, as Amoco hoped, the dealer gained more cash customers from the discount for cash than he lost credit card customers by the surcharge for credit, both Amoco and the dealer would be better off. Of course a dealer who for one reason or another was much better at attracting credit card customers than cash customers might end up worse off.

Remus, we assume, is one of those dealers, and his class consists of the rest of them--though whether Remus or any other dealer actually lost money from the unbundling of cash and credit card sales that we have described has not been determined. Remus's principal complaint is that the unbundling altered the terms of his franchise unilaterally, in violation of the Fair Dealership Law. To this Amoco first replies, very feebly as it seems to us, that Remus enthusiastically embraced the discount for cash program--that is, agreed to pass along the wholesale price reduction to his cash customers in order to attract more of them--and therefore the franchise was modified by mutual consent of the parties. But Remus had no real choice. As long as some Amoco dealers passed on Amoco's wholesale price reduction to consumers in order to get more cash customers, competition would force the others to follow suit unless they wanted to lose their cash customers; and once Remus was thus forced to offer a discount for cash, he would have to charge a surcharge for credit in order to maintain his revenues. As Remus therefore had no alternative (at least if he wanted to remain an Amoco dealer) to accepting the unbundling, his best policy was to grin and bear it. To say he consented to the change in the system of pricing is like saying that the author of this opinion consents to being 47 years old. Amoco forced the change on Remus and we must decide whether it is the kind of unilateral change that the Wisconsin Fair Dealership Law forbids.

Two provisions of the law are relevant. Section 135.03 forbids the franchisor to "terminate, cancel, fail to renew or substantially change the competitive circumstances of a dealership agreement without good cause." Section 135.04 requires the franchisor to give the dealer "at least 90 days' prior written notice of termination, cancellation, nonrenewal or substantial change in competitive circumstances. The notice shall state all the reasons for termination, cancellation, nonrenewal or substantial change in competitive circumstances and shall provide that the dealer has 60 days in which to rectify any claimed deficiency." Remus argues that the statute forbids what Amoco has done. The unbundling, he argues, "substantially change[d] the competitive circumstances" of Remus's dealership agreement without 90 days' prior written notice, and notice aside Amoco had no "good cause" to make this change when "good cause" is confined, as the provision for cure implies, to deficiencies on the part of the dealer.

The statute's main purpose is to give dealers a kind of tenure--like federal...