Shell Oil Co. v. Hrn, Inc., 03-0555.

• Decision Date: 27 August 2004
• Docket Number: No. 03-0555.,03-0555.
• Citation: 144 S.W.3d 429
• Parties: SHELL OIL COMPANY, Motiva Enterprises LLC, Equilon Enterprises LLC, and Equiva Services LLC, Petitioners, v. HRN, INC., et al., Respondents.
• Court: Texas Supreme Court

144 S.W.3d 429 SHELL OIL COMPANY, Motiva Enterprises LLC, Equilon Enterprises LLC, and Equiva Services LLC, Petitioners,
v.
HRN, INC., et al., Respondents. No. 03-0555. Supreme Court of Texas. Argued February 4, 2004. Decided August 27, 2004.

Appeal from the 234th District Court, Harris County, Scott A. Brister, J.

[144 S.W.3d 430]

J. Michael Baldwin, J. Gregory Copeland, Macey Reasoner Stokes, Richard A. Brooks, David M. Rodi, Baker Botts, L.L.P., Ann Spiegel, Shell Oil Co., Houston, for petitioners.

George M. Fleming, Sylvia Davidow, Anita F. Kawaja, Fleming & Associates, L.L.P., Michael O'Brien, Mike O'Brien, P.C., Robert L. Steinberg, Law Office of Robert L. Steinberg, Houston, Paul B. Rosen, Law Office of Paul B. Rosen, Bellaire, Ronald J. Mann, Austin, for respondent.

Roger Townsend, Alexander Dubose Jones & Townsend LLP, Houston, for Amicus Curiae Exxon Mobil Corporation.

Richard A. Schwartz, Schwartz Junell Campbell & Oathout, L.L.P., Houston, and Richard C. Godfrey, Kirkland & Ellis LLP, Chicago, IL, for Amicus Curiae BP Products North America Inc.

Chief Justice PHILLIPS delivered the opinion of the Court.

In this case, we must decide whether the price fixed by a refiner for the sale of its gasoline under an open-price-term contract with its dealers was in good faith as required by section 2.305(b) of the Texas Business and Commerce Code. The dealers claim that the refiner's pricing practices are forcing them out of business and therefore are not in good faith. The trial court concluded that the refiner had established its good faith as a matter of law, but the court of appeals reversed the summary judgment, concluding that circumstantial evidence raised a fact issue about the refiner's good faith. HRN, Inc. v. Shell Oil Co., 102 S.W.3d 205 (Tex.App.-Houston [14th Dist.] 2003). Although the refiner's

144 S.W.3d 431

price was commercially reasonable when compared to the prices of other refiners in the relevant market, the court found some evidence in the record to suggest that the refiner's price might have been influenced by improper subjective motives such as the desire to force some of its dealers out of business. Because we conclude that the refiner established as a matter of law that its price was fixed in good faith as defined in the Code, we reverse the judgment of the court of appeals and render judgment that plaintiffs take nothing.

I

Plaintiffs are several hundred lessee dealers in seventeen different states who lease service stations and buy gasoline from Shell, operating those stations as independent businesses.¹ Each dealer and Shell enter into two agreements: a Lease and a Dealer Agreement. Shell's relationship with its lessee dealers is also governed by the federal Petroleum Marketing Practices Act ("PMPA"), which regulates the grounds for termination and nonrenewal of petroleum franchise relationships. 15 U.S.C. §§ 2801-2806.

In the Dealer Agreement, each dealer agrees to buy Shell-branded gasoline from Shell at the "dealer prices ... in effect" at the time of purchase. Shell's price to its dealers is referred to as the DTW ("dealer tank wagon") price because it includes delivery to the dealer's station by a Shell tanker truck. The DTW pricing provision is an "open price term" governed by section 2.305(b) of the Texas Business and Commerce Code (which corresponds to section 2-305(2) of the Uniform Commercial Code). Open-price-term contracts are commonly used in the gasoline refining and marketing industry due to price volatility.

Shell markets gasoline to the public through a retail network that includes not only lessee dealers, but open dealers and company-operated stations as well. First, Shell acts as a franchisor, leasing service stations to franchisees such as the Dealers here that sell Shell-branded gasoline. Second, Shell sells Shell-branded gasoline directly to the public through company-operated stations. Finally, Shell sells branded and unbranded gasoline to jobbers. Some jobbers are wholesale distributors, selling Shell-branded and unbranded gasoline to stations operated by independent business owners. Other jobbers are also independent retail dealers, selling Shell-branded and unbranded gasoline directly to the public.

Jobbers operate fleets of trucks to pick up gasoline at refiners' terminals and distribute it to their own stations or to independent ones. Jobbers may have distribution agreements with several refiners simultaneously. Jobbers pay a "rack" price that is available for gasoline bought and picked up at Shell's terminals. The DTW price is typically higher than the rack price, although Shell does not set either price in relation to the other.

Shell's agreements with the Dealers prohibit them from selling any gasoline except Shell-branded gasoline. Although the contracts with the Dealers do not require them to buy Shell gasoline exclusively from Shell itself, agreements between Shell and its jobbers effectively eliminate the only major alternative source for Shell-branded gasoline. When a jobber sells gasoline to a Dealer, the jobber is retroactively charged the DTW price for that

144 S.W.3d 432

product, not the lower rack price it otherwise would pay.

The Dealers claim that Shell's pricing practices are forcing them out of business. Although Shell has the right under the Dealer Agreement to fix the DTW price at which the Dealers must buy its gasoline, all parties agree that it must exercise this right in good faith. See Tex. Bus. & Com.Code § 2.305(b). Dealers claim that Shell's DTW prices cannot be set in good faith because they are so high that they put Dealers at a competitive disadvantage. Dealers further assert that Shell's DTW pricing is part of a plan to replace them with company-operated outlets which are more profitable for Shell.

Shell moved for summary judgment on Dealers' good-faith pricing claims, contending that it was entitled to judgment as a matter of law because it charged a posted price applied uniformly to all Dealers and was a commercially reasonable price as well. Rather than contest the commercial reasonableness of Shell's DTW prices, Dealers argued that fact issues existed as to whether Shell had acted in bad faith by setting its DTW price with the subjectively improper motive of running Dealers out of business.

The trial court granted Shell's motion for summary judgment. The court of appeals reversed and remanded the case for trial, concluding that the Dealers had raised fact issues about Shell's subjective good faith when setting its DTW price. 102 S.W.3d 205.

II

Most contracts for the sale of goods specify a price, but some do not because either the parties fail to consider the issue directly or purposefully leave it for later determination. When a contract for the sale of goods does not specify a price, section 2.305 of the Uniform Commercial Code² supplies default rules for determining whether a contract exists and what the price should be. This section is one of a series of provisions in Article 2 of the Code that fill common "gaps" in commercial contracts.

In this instance, the Code imposes on Shell the obligation of good faith when fixing its DTW price under the Dealer Agreement, providing that "[a] price to be fixed by the seller or by the buyer means a price for him to fix in good faith." Tex. Bus. & Com.Code § 2.305(b). Good faith is defined elsewhere in the Code to mean "honesty in fact and the observance of reasonable commercial standards of fair

144 S.W.3d 433

dealing." Id. § 1.201(b)(20).³ Official Comment 3 to section 2.305(b) further elaborates on the good faith requirement, creating a presumption in the normal case that a seller's posted price or price in effect is also a good faith price:

3. Subsection [b], 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). 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.

Tex. Bus. & Com.Code § 2.305 cmt. 3 (emphasis added). Despite this definition and comment, or perhaps because of them, Shell and the Dealers urge conflicting ideas about what good faith should mean in this case.

Shell argues that a good faith price, as section 2.305(b) requires, is one that is commercially reasonable and non-discriminatory. Because its DTW price fell within the range of DTW prices charged by other refiners in the relevant geographic markets (was commercially reasonable) and was applied uniformly among similarly-situated dealers (was non-discriminatory), Shell submits that summary judgment was appropriate. According to Shell, the chief concern of the drafters in adopting section 2.305(b) was to prevent suppliers from charging two buyers with identical pricing provisions different prices for arbitrary or discriminatory reasons. The drafters, however, also wished to minimize judicial intrusion into the setting of prices under open-price-term contracts. To balance these concerns, the drafters created a presumption under Official Comment 3 that a "posted price" or "price in effect" is a good faith price that may be rebutted only by evidence of discrimination. Shell asserts that because the Dealers brought forth no such evidence here, this is a normal case where the posted price or a price in effect is a good faith price under section 2.305.

The Dealers respond that Shell's concept of good faith and the "normal case" under section 2.305 is too narrow. They reject the notion that discriminatory pricing is the only way to rebut Comment 3's posted price presumption. Instead, the Dealers submit...