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Consumers Oil Corp. v. Phillips Petroleum Co.

decided as amended november 29 1973.: November 12, 1973.



Hastie, Van Dusen and Gibbons, Circuit Judges.

Author: Hastie


HASTIE, Circuit Judge.

In this diversity action, Consumers Oil Corporation, a New Jersey jobber, asked the District Court for the District of New Jersey to restrain Phillips Petroleum Co., a national refiner of petroleum products, from terminating the franchise under which Consumers buys gasoline from Phillips for resale. Consumers contends that Phillips' attempt to terminate the franchise violates the New Jersey Franchise Practices Act, N.J.S.A. 56:10, even though Phillips is acting strictly in accordance with express terms of the contract that created the franchise and provided for its termination.

After an evidentiary hearing, the district court denied a motion for preliminary injunction. Consumers has appealed from that order.

Under successive contracts, Consumers has been a Phillips franchisee since 1961. The contract now in controversy related to gasoline only and became effective July 1, 1970. It granted a franchise for a stated term of one year and provided that automatic extensions for like periods would follow unless either party, at its pleasure, should terminate the contract by written notice at least 90 days prior to the end of the first or any subsequent contract year.

The New Jersey Franchise Practices Act became effective December 21, 1971, when the contract between the parties was in its second year. Thereafter, neither party elected to terminate the contract as of June 30, 1972, although on June 16, 1972 Phillips notified Consumers and all other jobbers similarly situated throughout its "northeast marketing area" that it did not intend to renew or extend its existing contractual commitments to them. Consistent with that announcement, Phillips thereafter gave Consumers timely formal notice of termination of their contract effective July 1, 1973.

Neither party has expressed dissatisfaction with the performance of the other. The record contains an affidavit, filed by appellant, stating that the contract with Consumers had been and was likely to continue to be profitable to Phillips. Moreover, there is evidence that Phillips could continue to supply Consumers with gasoline from the pipeline in northern New Jersey despite termination of its other New Jersey activities. However, the district court found that, before the occurrence of the present gasoline shortage, Phillips had decided to withdraw entirely from its northeast marketing area (the New England states, New York, New Jersey, Delaware and all of Pennsylvania except a small area centering on Harrisburg and contiguous to Maryland) because in totality its operations there had proved unprofitable.

Section 56:10-5 of the New Jersey Franchise Practices Act, after authorizing termination of a franchise where the franchisee has either abandoned the franchise or been convicted of certain wrongdoing, continues as follows:

"It shall be a violation of this act for a franchisor to terminate, cancel or fail to renew a franchise without good cause. For the purposes of this act, good cause for terminating, canceling or failing to renew a franchise shall be limited to failure to substantially comply with those requirements imposed upon him by the franchise." Section 56:10-8 reads:

"This act shall not apply to a franchise granted prior to the effective date of this act, provided, however, that a renewal of a franchise or an amendment to an existing franchise shall not be excluded from the application of this act."

The district court found that denial of a preliminary injunction would result in irreparable harm to Consumers but nevertheless denied relief. It reasoned that the franchise had been granted before the December 1971 effective date of the Act and that, within the meaning of Section 56:10-8, it had not been "amended" or "renewed" since that time. Accordingly, the court concluded that the Act did not apply to this case. However, in our view, the extension of the present franchise for one year beginning July 1, 1972 can reasonably be considered a "renewal" within the meaning of the Act.

Section 56:10-8 was included in the Act because of doubt about the constitutionality of retroactive application. In substance, the doubt was resolved by restricting the Act to those pre-existing franchises that should be extended voluntarily after the Act's adoption. The meaning of "renewal" can rationally be said to be as broad as this purpose. Here, the parties drafted their agreement as a one year contract that would be extended automatically for successive one year terms unless either party, at its option and without penalty, should give timely notice during any contract year that the contract would not be extended beyond the end of the year. Thus, when the Franchise Practices Act became law, neither party was obligated beyond June 30, 1972. The acquiescence of both parties was required for the extension of their contract beyond that date. This suggests that, for purposes of the Act, it makes no difference whether the agreed method of making acquiescence manifest was by affirmative action or by nonaction. In either event, the necessity for a manifestation of assent by both parties to the continuation of the franchise beyond June 30, 1972, made the extension of the contract voluntary and probably within the intended legislative reach. If a decision favorable to Consumers on this issue could ...

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