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BPALOMBI v. GETTY OIL CO.

UNITED STATES DISTRICT COURT, EASTERN DISTRICT OF PENNSYLVANIA


October 27, 1980

William L. BPALOMBI
v.
GETTY OIL COMPANY t/a Getty

The opinion of the court was delivered by: BECHTLE

MEMORANDUM OPINION

This action arose out of defendant Getty Oil Company's ("Getty") termination of plaintiff William L. Palombi ("Palombi") as the operator of a service station following some events deemed by defendant to be grounds upon which the franchise should be terminated, including Palombi's conviction in the United States District Court for price-gouging. This Memorandum Opinion is filed in support of the Court's Order of September 8, 1980, granting defendant's motion for summary judgment on plaintiff's only remaining claim. *fn1"

  A motion for summary judgment under Fed.R.Civ.P. 56 must be granted "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." The evidence presented to the Court, and the inferences to be drawn therefrom, "must be viewed in the light most favorable to the opposing party." Adickes v. S. H. Kress & Co., 398 U.S. 144, 157, 90 S. Ct. 1598, 1608, 26 L. Ed. 2d 142 (1970).

 Based on these standards, the Court finds that the record supports the following findings of fact: In 1968, Palombi entered into a "lease" for a service station from Getty for a term of one year. The lease was renewable annually "subject to termination at the end of the initial period or any subsequent year by either party upon ten days' prior written notice to the other." See Amended Complaint, Ex. A, P 2. Monthly rent was based on the number of gallons delivered. The lease provided that the premises were to be used "solely ... as a motor vehicle service station, and for the sale of such commodities and services as are usually sold at such stations." Amended Complaint, Ex. A, P 4. The lease also required that the service station be kept open between specified hours and that Palombi, as lessee, maintain an adequate stock of tires, batteries and accessories. Palombi was further required to maintain the premises "in a good, clean, and tidy condition at all times" and to obtain Getty's approval of any advertising located on the premises.

 Under this agreement and subsequent renewals, Palombi operated the service station for several years without incident. Indeed, Palombi ranked first in sales of gasoline by-volume in the Philadelphia metropolitan area in each of the four years 1970-1973. See Motion of Defendant Getty Oil Company for Summary Judgment, Ex. 1; Answer to Interrogatory 21, at 13.

 In 1974, the Government instituted criminal proceedings in this district charging Palombi with, inter alia, selling gasoline at prices exceeding limits established by the Federal Emergency Petroleum Allocation Act of 1973, 15 U.S.C. §§ 751 et seq. (1976), and regulations promulgated thereunder-to which Palombi pleaded guilty. See Motion of Defendant Getty Oil Company for Summary Judgment, Ex. 5. Immediately thereafter, Palombi's gasoline sales fell and remained at a low level throughout the remainder of his tenure at the service station. See Motion of Defendant Getty Oil Company, Ex. 1; Answers to Interrogatories 15 and 21, at 10 and 13.

 On March 31, 1975, Getty terminated Palombi's lease. *fn2" A memorandum seeking clearance of the termination from Getty's legal department recited a host of reasons for the decision. *fn3" The last paragraph devoted to this itemization includes the following statement:

 

Perhaps the most damaging of all to the reputation of this particular station, Getty Oil Eastern and our Getty Dealer organization, were charges ... when (sic ) the United States Attorney's office had filed criminal and civil actions against Mr. Palombi for allegedly overcharging customers ... and with falsifying records to the Internal Revenue Service to justify higher prices.

 Motion of Defendant Getty Oil Company for Summary Judgment, Ex. 3, at 3. The price-gouging charge and subsequent conviction are also the initial reasons specified by Getty in answer to the plaintiff's interrogatory seeking Getty's grounds for termination. Id., Ex. 1; Answer to Interrogatory 8, at 4.

 Nearly four years later, Palombi filed this action. Palombi's sole surviving claim at this stage of the litigation is that the gasoline station lease involved here constituted a franchise agreement and that Getty's termination of Palombi's franchise did not comply with the principles established by the Supreme Court of Pennsylvania in Atlantic Richfield Co. v. Razumic, 480 Pa. 366, 390 A.2d 736 (1978). *fn4" Like the instant case, Razumic involved the termination of a service station "lease" by the leasing oil company. The parties had signed what was captioned a "DEALER LEASE," authorizing the lessee to operate a service station for a term of three years, subject to the right of the lessee to terminate the lease on any anniversary date by giving 60 days' advance written notice to the lessor. Id. at 377, 390 A.2d at 741. The agreement in Razumic, much like the agreement here, determined rent by monthly volume of gasoline sold and required the dealer to provide a certified statement containing all the information necessary to calculate the monthly rental. The agreement also did not allow the dealer to "make any additions, alterations or improvement to the leased premises nor place, alter, remove, deface, or obliterate any signs, trademarks or color arrangements appearing thereon" without the lessor's consent. Further, one of several standardized riders accompanying the "DEALER LEASE" required that the service station be operated "in such a manner as to reflect favorably on (the lessor supplier's) goodwill, trademarks and trade names." Finally, the same rider required the dealer to operate the service station 24-hours-a-day/7-days-a-week; stock a sufficient inventory of tires, batteries and accessories; provide adequate lighting; and, "maintain adequate and sufficient attendants." Id. at 374-376, 390 A.2d at 740-741.

 The Razumic court held that such an agreement established a franchise relationship between the parties. Id. at 374, 390 A.2d at 740. That court noted that in such a relationship the franchisee benefits from the goodwill associated with the franchisor's trademark and products. However, as the court also noted, the continued value of that goodwill is heavily dependent upon the quality of the franchisee's service delivered in the name of the franchisor. The court reasoned that the investments necessarily undertaken justify the franchisee's expectation that those investments "will not be destroyed as a result of (the franchisor's) arbitrary decision to terminate their franchise relationship." Id. at 378, 390 A.2d at 742. Therefore, the Pennsylvania Supreme Court held that, ["consistent] with these reasonable expectations, and (a franchisor's) obligation to deal with its franchisees in good faith and in a commercially reasonable manner, (a franchisor) cannot arbitrarily sever its franchise relationship." Id. (emphasis added).

 The agreement involved in this case clearly contemplates a franchise relationship. As our recitation of the facts should indicate, the agreement here contains substantially the same provisions as the agreement involved in Razumic.

 Getty argues, however, that Palombi's termination was not arbitrary but was based, at least in part, upon Palombi's price-gouging conviction. In answer, Palombi contends that under Razumic a termination must be found to be reasonable under all the circumstances. Since the Court must be apprised of all the facts, Palombi argues, summary judgment is inappropriate.

 The Court rejects Palombi's interpretation of Razumic. The significant language in Razumic, quoted earlier, declares only that there is a duty upon the franchisor not to act arbitrarily. *fn5" The Court interprets this language to mean that, if the franchisor can show at least one legally sufficient reason to terminate, the termination is valid under Razumic.

 The law could not reasonably be otherwise. A rule to the contrary would require courts to reexamine the reasonableness of an exercise of business judgment. Razumic seeks only to ensure that some sufficient reason exists for the termination. It does not guarantee every dealer a right to what would amount to de novo review.

 The Court turns then to the legal sufficiency of Getty's proffered ground for termination. Certainly there can be few more compelling justifications for terminating a service station franchise than the indictment and conviction of the franchisee for price-gouging. Through trademarks and advertising, the consumer comes to link supplier and dealer. When the dealer is convicted of price-gouging, the suggestion of fraud necessarily taints the supplier's reputation. That such a charge and conviction would support a dealer's termination seems indisputable.

 The Court finds additional support for this holding in the Pennsylvania Gasoline Act, Pa.Stat.Ann. tit. 73, §§ 202-1 et seq. (Purdon Supp.1980). In doing so, the court follows the example of the court in Razumic. Although the provisions of the Act were not expressly applicable to the agreement in Razumic, *fn6" the Razumic court relied upon it as an embodiment of "sound and beneficial legislative judgments which reflect both the expectations and obligations inherent in this franchise relationship." 480 Pa. at 380, 390 A.2d at 743. Since the Act prohibits suppliers of petroleum products from terminating service station operators unless the supplier acts for "one of" nine specified reasons, the Razumic court concluded that the Act supported the view that a franchise termination could not be arbitrary.

 The parties agree, and this Court concurs, that the Act is also not directly applicable here. Nevertheless, the Act lends support for this Court's decision.

 First, the Act does not require that the termination be found to be reasonable under all the circumstances. It is enough that the termination be based upon "one of" the enumerated reasons. Thus, the Act supports this Court's view of Razumic that a termination is permissible if there is one commercially reasonable basis for it.

 Further, the Act's enumerated reasons include two which comprehend the facts of this case:

 

(8) Failure by the lessee dealer to comply with Federal, State or local laws or regulations which are related to the operation of the gasoline service station business and which may affect the relationship between the lessor supplier and the lessee dealer and such failure to comply therewith has or may have an adverse effect on the lessor supplier.

 

(9) Conviction of the lessee dealer of a criminal offense which is related to the operation of the business or would affect the ability of the lessee dealer to operate the business or would tend to defame the reputation of the lessor supplier.

 Pa.Stat.Ann. tit. 73, § 202-3(b)(8), (9) (Purdon Supp.1980) (emphasis added).

 With regard to the first of these, Palombi's failure to comply with federal law or regulations is conclusively established by his conviction. Moreover, since the federal law violated regulates the price charged at the pump, it is clearly "related to" the operation of a service station and may "affect" the relationship between the lessor supplier and the lessee dealer. Lastly, the failure to comply may indeed adversely affect a lessor supplier by causing consumers to buy elsewhere and subjecting the supplier's reputation to severe and irremediable damage.

 Even stronger in its support of this termination is the second-quoted provision. The offense of which Palombi was convicted price-gouging is "related to the operation of the business" because determining the price of the goods or services to be sold is of the essence of any business. Moreover, the offense is one which would "tend to defame the reputation of the lessor supplier." A franchise relationship purposely creates in the public mind so close an association between the dealer's service and the supplier's name that a dealer's conviction for price-gouging cannot help injuring the supplier's reputation for integrity and fairness. *fn7" Thus, under this provision, Palombi's price-gouging conviction is a legally sufficient ground for termination in those two respects.

 Since the Court concludes that Razumic requires only that the termination of a service station franchise not be arbitrary and, since the Court further finds Palombi's price-gouging conviction to be a legally sufficient ground for termination, the Court must conclude that Getty is entitled to judgment as a matter of law, *fn8" and so ordered on September 8, 1980.


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