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GULF OIL CORPORATION v. MAYS (10/10/60)

THE SUPREME COURT OF PENNSYLVANIA


October 10, 1960

GULF OIL CORPORATION
v.
MAYS, APPELLANT.

Appeal, no. 157, Jan. T., 1960, from decree of Court of Common Pleas of Berks County, No. 2813 Equity Docket, 1959, in case of Gulf Oil Corporation v. Claude E. Mays, individually and trading as Mays Gulf Service. Decree reversed; reargument refused November 22, 1960.

COUNSEL

George B. Balmer, with him Raymond C. Schlegel, Harry W. Speidel, and Snyder, Balmer & Kershner, for appellant.

John T. Clary, with him Richard A. Bausher, George B. Clothier, Roy D. Jackson, Jr., and Stevens & Lee, and Obermayer, Rebmann, Maxwell & Hippel, for appellee.

Before Jones, C.j., Bell, Musmanno, Jones, Cohen and Eagen, JJ.

Author: Cohen

[ 401 Pa. Page 414]

OPINION BY MR. JUSTICE COHEN

On September 15, 1955, Claude E. Mays purchased a gasoline service station in Berks County and began trading as Mays Gulf Service (Mays). On the same date Mays and Gulf Oil Corporation (Gulf) entered into a sales agreement whereby Mays agreed to purchase from Gulf all his requirements of "Gulf motor fuels" for resale at his gasoline station but not "less than 90,000 gallons of such motor fuels per annum." The contract was to extend fifteen years.

From the time the sales agreement was entered into until the time of hearing in the court below, Mays purchased more than the minimum required gallonage of Gulf motor fuels each year.

When Mays and Gulf entered into the sales agreement, Gulf had no Fair Trade agreements with any of its retail dealers. On January 12, 1959, Gulf, acting

[ 401 Pa. Page 415]

    pursuant to the Pennsylvania Fair Trade Act,*fn1 entered into Fair Trade agreements with its retail dealers establishing minimum retail prices for the sale of Gulf motor fuels.*fn2 Mays did not sign an agreement with Gulf. Each nonsigning retail dealer, including Mays, was duly notified that Gulf had entered into these agreements with other dealers and advised of the terms thereof. All Gulf's retail dealers, including those who had not signed agreements, with the exception of Mays, observed and complied with the stipulated prices.

Despite warnings by Gulf, Mays continued to sell such fuels at prices one cent less than the stipulated prices.

On March 26, 1959 Gulf filed an equity action against Mays in the Court of Common Pleas of Berks County seeking to enjoin him from continuing to sell Gulf motor fuels at less than the stipulated prices. After a hearing, a preliminary injunction was denied. The matter then went to final hearing and, on December 30, 1959, a final injunction decree was entered by a divided court. This decree permanently enjoined Mays from selling Gulf motor fuels at less than the stipulated prices and is the basis of this appeal.

Mays' contentions are three-fold: (1) by reason of the sales agreement of 1955, etc., Mays became a dealer in a "captive" status and hence not within the Fair Trade Act provision; (2) in the absence of proof of any specific damage caused by Mays' sales of Gulf motor fuels at less than the stipulated prices, Gulf is not entitled to injunctive relief; (3) the chancellor erred in his refusal to permit Mays to show that in

[ 401 Pa. Page 4161956]

- prior to Gulf's Fair Trade agreements - when he sold Gulf motor fuels at Gulf's then recommended prices, he suffered a loss of business.

The accepted purpose of a fair trade act "is to prevent predatory price-cutting and cutthroat competition, and to protect owners and public alike against unfair practices in the distribution of articles of standard quality under a distinguished brand or mark." Sinclair Refining Company v. Schwartz, 398 Pa. 60, 63, 157 A.2d 63 (1959). Such legislation has withstood the challenge of transgressing the "due process" and "equal protection" clauses of the 14th Amendment on the ground that it is an appropriate exercise of the state police power reasonably calculated to prevent price-cutting and "loss-leader" practices which debase the good-will of a product known by its brand or trademark, injuring both the distributor and public in general. Old Dearborn Destributing Co. v. Seagram-Distillers Corp., 299 U.S. 183, 57 S.Ct. 139, 81 L.ed. 109 (1936).

Under the Pennsylvania Fair Trade Act, both "signers" and "non-signers"*fn3 alike are bound to observe the minimum resale price set by a fair-trade distributor when a valid fair-trade contract has been entered into within the Commonwealth. Legitimization of such contracts, however, is completely dependent upon strict compliance with the Pennsylvania Fair Trade Act, and, where interstate commerce is affected, there must also be compliance with the federal fair-trade legislation, since both at common law and under the Sherman Anti-Trust Act minimum resale price maintenance contracts were held to be illegal per se as unreasonable restraints of trade. Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373, 31 S.Ct. 376, 55 L.ed. 502 (1911); Schwegmann Bros. v.

[ 401 Pa. Page 417]

Eminent authorities are highly critical of this exempting legislation on the grounds that it relieves distributors whose inventory consists largely of "fair-trade" products from the pressures and tribulations of price competition, and in general facilitates price fixing efforts on the manufacturing and distributive levels, contrary to the most elementary principles of a dynamic free enterprise system.*fn6 The inclusion in the Fair Trade Acts of the Provisos that the commodity must be "in free and open competition" with similar products and that competitors could not enter into fair trade agreements was to assure that these dangers of horizontal price fixing would be held to a minimum. Accordingly, in order to protect the consuming public from any possible price exploitation, it is of the utmost importance that the distributor seeking the benefits of fair trade establish in fact that he has complied with these statutory prerequisites.

So far as gasoline distributors are concerned, such proof is not without difficulties. In Esso Standard Oil Company v. Secatore's, Inc., supra, the gasoline company not only supplied its gasoline to retail dealers but also sold direct to some ultimate consumers consisting mostly of operators of fleets of trucks. The court concluded that the gasoline company was in competition with the "non-signer" retailer defendant who also did substantial business with operators of fleets of motor vehicles, and held that retail price maintenance agreements between the gasoline company and third parties were illegal under the federal legislation and could not therefore be enforced under the "non-signer" provision of the State Fair Trade Act against the defendant.

[ 401 Pa. Page 420]

It also seems that in a given geographic area practically all the major brands of gasoline are sold at the same price. The federal courts have long held that business behavior which results in approximating competitor's prices is admissible circumstantial evidence from which the fact-finder may infer agreement between the parties. Theatre Enterprises, Inc. v. Paramount Filming Distributing Corp., 346 U.S. 537, 74 S.Ct. 257, 98 L.ed. 273 (1954). If there is so-called "conscious parallelism" in fixing gasoline prices, it is certainly probative evidence that in fact gasoline is not sold in free and open competition. Since these conditions and circumstances prevail at least to some extent in the distribution of gasoline products, it is incumbent upon the appellee here to prove to the satisfaction of the court that it is not engaged in competition similar to that in Secatore's, Inc., and that it is not a party to any agreement or conspiracy to fix prices.

Since the record must be remanded for further proceedings, some other matters deserve comment. By its very nature, the gasoline industry does not clearly appear to be appropriately suitable for fair-trade usages. Virtually all retail service stations sell but one brand of gasoline, which, for all practical purposes, is their major product. There is little possibility of "lossleader" selling by single product retailers. Apparently, gasoline companies buy and sell each other's gasoline when temporary shortage conditions prevail, or to shortcut transportation costs, or to remove "wildcat" surpluses from the market, or for sundry other reasons. If the gasoline sold is other than that of the company's whose name appears on the pump, little argument can be made that the prestige of the trade mark or brand is being protected. When these two basic reasons for fair trade are removed from consideration,

[ 401 Pa. Page 421]

    the result is that the price and not the product is being protected. In such circumstances, grave problems arise as to whether a "non-signer" can constitutionally be bound to follow fair-trade restrictions. See Burche Co. v. General Electric Company, supra, wherein this Court sustained the constitutionality of the "non-signer" provision on the basis of the Old Dearborn decision.

It is quite true that this Court has decided that "gasoline" as a commodity is within the protection of our Fair Trade Act under a literal reading of its provisions: Sinclair Refining Company v. Schwartz, supra. Indeed, the addition to our act of the phrase "or the vending equipment from which that commodity is sold to the consumer bears," by separate amendment in 1941, Act of June 12, 1941, P.L. 128, leaves little doubt that our legislature intended fair-trade coverage to include the gasoline industry. We did not, however, decide in the Sinclair case whether consistently with the Constitution a "non-signer" could be forced to obey a fair-trade program set by a gasoline company, nor did we investigate whether the overriding federal legislation exempted gasoline from antitrust condemnation. The Sinclair decision went only so far as to dissolve a preliminary injunction pending a full hearing because the gasoline company did not show irreparable harm and failed to advance sufficient evidence showing that its product was "in fair and open competition with" gasoline of other producers. Before lending the power of equity to a program protecting resale prices of a product, widely used by the consuming public, the court below must thoroughly examine this problem of whether a gasoline company may validly resort to fair trade privileges.

Disposition

The decree of the court below is reversed, and the case is remanded for further proceedings consistent with this opinion.

[ 401 Pa. Page 422]

DISSENTING OPINION BY MR. JUSTICE BENJAMIN R. JONES:

On September 15, 1955, Claude E. Mays, trading as Mays Gulf Service (Mays), with financial assistance of Gulf Oil Corporation (Gulf), purchased a gasoline service station in Reiffton, Berks County. To finance this transaction Mays borrowed $25,000 from the Mellon National Bank and Trust Company. This loan was evidenced by two notes signed by Mays: one note for $6928.75 payable in five years and another note for $18,071.25 payable in fifteen years, both notes bearing interest at three and one-half (3 1/2%) percent annually. Mays' obligation to the Mellon Bank was unconditionally guaranteed by Gulf.

To secure Gulf's guaranty, Mays and his wife gave Gulf a mortgage, with accompanying bond, for $25,000 covering the gasoline station. On the same date, mays and Gulf entered into two other separate agreements: a sales agreement and a lease option agreement. Under the sales agreement Mays agreed to purchase over a period of fifteen years all his requirements of "Gulf motor fuels" for resale at his gasoline station but not "less than 90,000 gallons of such motor fuels per annum". Under the lease option agreement*fn1 Mays and his wife gave to Gulf "an irrevocable option" to lease the gasoline station for $200 per month, the option being for a fifteen year period and to be exercised upon the happening of any one or more certain specified conditions.*fn2

[ 401 Pa. Page 423]

From the time the sales agreement was entered into until the time of hearing in the court below mays has purchased each year more than the minimum required gallonage of Gulf motor fuels.*fn3

At the time Mays and gulf entered into the sales agreement, Gulf had no Fair Trade agreements with any of its retail dealers. On January 12, 1959, Gulf, acting pursuant to the Pennsylvania Fair Trade Act,*fn4 entered into Fair Trade agreements with its retail dealers establishing minimum retail prices for the sale of Gulf motor fuels.*fn5 Mays did not sign an agreement with Gulf. Each non-signing retail dealer, including Mays, was duly notified that Gulf had entered into these agreements with other dealers and advised of the terms thereof.*fn6 All Gulf's retail dealers, including those who had not signed agreements, with the exception of Mays, observed and complied with the stipulated prices.

Despite warnings by Gulf, Mays continued to sell such fuels at prices one cent less than the stipulated prices.*fn7

[ 401 Pa. Page 424]

On March 26, 1959 Gulf filed an equity action against Mays in the Court of Common Pleas of Berks County seeking to enjoin Mays from continuing to sell Gulf motor fuels at less than the stipulated prices. After a preliminary hearing, a preliminary injunction was denied. The matter then went to final hearing and, on December 30, 1959, a permanent injunction was granted by a divided court.*fn8 This decree permanently enjoined Mays from selling Gulf motor fuels at less than the stipulated prices. That decree is the basis of this appeal.

The majority of this Court would now reverse this decree and remand the record to the court below for further testimony upon the ground that Gulf has not shown its right to obtain equitable relief against a "non-signer" price cutter under the Fair Trade Act. The rationable of the majority opinion is that Gulf failed to prove that its gasoline was "in free and open competition with commodities of the same general class produced or distributed by others".

In its complaint Gulf alleged that "Gulf brand gasoline is sold to the consuming public by retailers, including defendant, from vending equipment which bears Gulf's trade marks and brands, and is in fair and open competition throughout Pennsylvania with gasolines of the same general class produced by others". Mays in his pleading admitted this averment. The majority opinion takes the unique position that Commonwealth*fn9 has an interest "in seeing that unlawful price fixing is not indulged in and that, by reason

[ 401 Pa. Page 425]

    of such interest on the part of the Commonwealth, it was encumbent upon Gulf, even though Mays admitted such fact, to prove that its gasoline was "in fair and open competition with commodities of the same general class produced by others". In other words, the generally accepted principle that a properly alleged fact averred in a complaint and admitted in the adversary's answer must still be proved if the Commonwealth - although not a party to the litigation - has a paternal interest therein.

The chancellor found: "5. Gulf brand gasoline is in fair and open competition with commodities of the same general class". The fact was averred in the complaint, admitted by the answer thereto and such portion of the pleading was admitted, with propriety and without objection, into the record of this case. No principle of law has been more frequently reiterated or more constantly adhered to by this Court than the rule that findings of fact by a chancellor, approved by the court en banc, will not be reversed by an appellate court if there is adequate evidence to sustain them: Whitehall Laboratories v. Wilbar, 397 Pa. 223, 235, 236, 154 A.2d 596; Masciantonio Will, 392 Pa. 362 367, 141 A.2d 362; McRobert v. Phelps, 391 Pa. 591 597, 138 A.2d 439; DeLuca v. DeLuca, 388 Pa. 167, 168, 130 A.2d 179. The present majority opinion completely ignores this well-established and salutary principle of law.

The majority opinion takes the position that there must be evidence upon this record, aside from the admission in the pleadings, to sustain the chancellor's finding of fact, a position novel, unique and without precedent in our law. While there was no oral testimony to establish the fact of "fair and open competition" there was no necessity for any such testimony inasmuch as that fact had been expressly conceded:

[ 401 Pa. Page 426]

    the principles enunciated in Sinclair are correct and should not be disturbed in any respect. To cast doubt on Sinclair can only create uncertainty and confusion in this area of the law.

I disagree with the opinion of the majority of the Court in this case. In my opinion, the majority's determination is without precedent and completely ignores principles of law adhered to for many years by this Court, and, therefore, I dissent.

Mr. Justice BELL joins in this opinion.


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