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Lugar v. TEXACO Inc.

February 14, 1985


On Appeal from the United States District Court for the Western District of Pennsylvania, D.C. Civil No. 81-2021).

Garth and Sloviter, Circuit Judges, and Lord, District Judge*fn* .

Author: Sloviter


SLOVITER, Circuit Judge.


This case addresses, for the first time, whether an oil company which supplies fuel to its franchised dealers is obliged, before failing to renew the franchise, to offer to assign to the dealer an option to purchase the premises under Title I of the Petroleum Marketing Practices Act (PMPA), 15 U.S.C. §§ 2801-2806 (1982).

Howard Lugar, the plaintiff below, operated a service station in Monroeville, Pennsylvania, pursuant to an agreement with Texaco, Inc. The property on which Lugar's Texaco station was located had been leased to Texaco in 1966 by Anna Wukich, the owner. The lease provided for an initial term which expired on May 31, 1981, but Texaco could renew the lease for three additional five-year terms. The lease also gave Texaco an option to purchase the property for $125,000 at any time after the tenth year of the lease. Texaco in turn subleased the property to Lugar. The sublease also expired on May 31, 1981.

Although the district court made no findings on this issue, the parties agree that Texaco decided to cease supplying its branded products directly to service stations in western Pennsylvania and to market them instead through distributors. To implement this decision, Texaco sought to divest itself of its direct obligations to retailers, including those to Lugar. Texaco advised Lugar in January 1981, confirmed by letter on February 20, 1981, that it would not renew the lease and sales agreement between them. On February 8, 1981, Lugar's attorney sent a letter to Texaco requesting that the purchase option in the Wukich to Texaco lease be assigned to Lugar. Texaco never responded to this request.


Congress enacted the PMPA in June 1978 after considerable debate and extensive inquiry into alleged unfair treatment of fuel dealers by their suppliers. Title I of the Act was designed to strengthen the position of the franchisees in bargaining with their franchisors. S. Rep. No. 731, 95th Cong., 2d Sess. 1, 18-19 reprinted in 1978 U.S. Code Cong. & Ad. News 873, 876-77 (hereafter Senate Report). Congress focused on two areas of particular concern to service station operators; nonrenewal of the franchise or its arbitrary termination. The Act provides that a franchisor may terminate or fail to renew a franchise only for the reasons provided in the statute and by giving the requisite notice, § 102(a), 15 U.S.C. § 2802(a) (1982). The permissible grounds are set forth in two sections of the Act, sections 102(b)(2) and 102(b)(3), 15 U.S.C. §§ 2802(b)(2), 2802(b)(3).

Five grounds are listed in section 102(b)(2) of the PMPA as valid bases for either termination or nonrenewal. They are: (A) the failure of the franchisee to comply with reasonable and material provisions of the franchise, 15 U.S.C. § 2802(b)(2)(A); (B) the failure of the franchisee to make good faith efforts to carry out the provisions of the franchise, 15 U.S.C. § 2802(b)(2)(B); (C) the occurrence of an event which is relevant to the franchise relationship and which makes termination or nonrenewal reasonable, 15 U.S.C. § 2802(b)(2)(C); (D) the termination or nonrenewal by written agreement, 15 U.S.C. § 2802(b)(2)(D); and (E) a determination by the franchisor made "in good faith and in the normal course of business" to withdraw from the relevant geographic marketing area, 15 U.S.C. § 2802(b)(2)(E).

The succeeding section 102(b)(3) sets forth additional grounds which may form the basis for nonrenewal, but not for termination. These include (A) failure of the parties to agree to changes in the franchise arrangement "made by the franchisor in good faith and in the normal course of business," 15 U.S.C. § 2802(b)(3)(A); (B) receipt by the franchisor of numerous bona fide complaints from customers regarding the franchisee's operations, 15 U.S.C. § 2802(b)(3)(B); (C) the franchisee's failure to operate the premises in a clean, safe, and healthful manner; and, finally, (D) the franchisor's determination "in good faith and in the normal course of business" to convert the premises to another use, to alter, add to or replace them, or to sell the premises, or its determination that renewal of the franchise relationship is likely to be uneconomical to the franchisor despite reasonable additions to the agreement, 15 U.S.C. § 2802(b)(3)(D).

A franchisor who relies on the grounds set forth in § 2802(b)(2)(E) or § 2802(b)(3)(D) for nonrenewal must first, if it leases the marketing premises, have made "a bona fide offer to sell, transfer, or assign to the franchisee such franchisor's interests in such premises," or have offered the franchisee a right of first refusal. 15 U.S.C. §§ 2802(b)(2)(E)(iii)(I), 2802(b)(3)(D)(iii). See Roberts v. Amoco Oil Co., 740 F.2d 602, 605-06 (8th Cir. 1984).

In his complaint Lugar alleged that Texaco was required to assign the purchase option to him pursuant to the provision in 15 U.S.C. § 2802(b)(3)(D)(iii). However, this section imposes obligations on a franchisor only if it seeks to justify nonrenewal of the franchise arrangement on the basis of its determination as set forth in that section. As the district court recognized, Texaco made no such determination. ...

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