UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT
September 24, 1985
SUN REFINING AND MARKETING COMPANY, APPELLANT
On Appeal from the United States District Court for the Eastern District of Pennsylvania (D.C. No. 84-2429).
...............................OPINION OF THE COURT
Before: HUNTER, GARTH, and HIGGINBOTHAM, Circuit Judges.
HUNTER, Circuit Judge :
1. Plaintiff-appellee John Rodgers ("Rodgers") originally brought an action to enjoin defendant-appellant Sun Refining & Marketing Company ("Sun") from terminating his gasoline dealer franchise in violation of the Petroleum Marketing Practices Act ("PMPA"), 15 U.S.C. § 2801 et seq. (1982). The District Court for the Eastern District of Pennsylvania found that Sun had grounds to refuse to renew the franchise relationship, but nevertheless allowed Rodgers to submit a proposed franchise agreement, which Sun refused to consider. Characterizing Sun's refusal to consider Rodger's proposal "arbitrary" and "the very type of circumstance that the [PMPA] is intended to protect a franchisee against," the district court extended the term of the original franchise agreement for an additional three years. Because the district court misconstrued the PMPA, we will reverse.
2. Since 1970, Rodgers and a partner operated a service station in Malvern, Pennsylvania, as Sun franchisees. In September 1981, the partnership dissolved, and Rodgers and Sun negotiated a franchise agreement for the same station. Before entering into the present franchise agreement, however, Sun contacted Rodgers regarding fuel outages*fn1 that occurred during the prior franchise agreement. Approximately two months before Rodgers took over the station from his partner, Sun wrote Rodgers, warning him to "see to it that you do not run out of gasoline for sale to the public or else we will have to pursue courses of action afforded to us by applicable law." On November 10, 1981, Rodgers and Sun entered into a three-year franchise agreement under which the parties agreed that the leased premises were to be used as a "retail gasoline service station" and that the resale of Sun's branded motor fuels was the essence of the agreement.
3. Between November 17, 1981 and January 10, 1984, Rodgers's cash flow problems caused him to run out of one or more gasoline products at least twenty times.*fn2 In a letter dated May 10, 1983, Sun offered to assist Rodgers in improving his cash flow by: releasing $10,000 from his "collateral deposit account" (a security account held by Sun); permitting Rodgers to deduct from the price of a load of gasoline an amount equal to the value of gasoline purchased by credit card customers whose receipts had not yet been validated;*fn3 and reducing the surcharge deposited into the collateral deposit account from one cent to one-half cent per gallon of gasoline purchased. In the same letter, Sun warned Rodgers that two additional fuel outages in any ninety day period would be deemed to exceed the minimum standard of fuel availability "at the heart" of the franchise relationship.*fn4 Nevertheless, Rodgers ran out of the super, plus, and regular grades of unleaded gasoline on January 5 and 10, 1984, and continued to experience fuel outages until the commencement of trial on November 2, 1984.
4. On March 1, 1984, Sun advised Rodgers that the franchise would be terminated June 4, 1984. Rodgers filed a complaint and motion for a preliminary injunction on May 18, 1984, alleging that Sun's termination of the franchise violated the PMPA. By stipulation approved by the court and entered on May 31, 1984, the parties agreed to consolidate the preliminary injunction hearing with the trial on the merits, and to maintain the status quo with respect to the franchise agreement pending a final order.
5. On November 14, 1984, the district court delivered its findings of fact and conclusions of law. The court characterized the dispute as a failure to renew the franchise relationship and determined that the evidence supported Sun's refusal to renew. Despite this finding, the district court allowed Rodgers two weeks to offer Sun a proposal concerning the continuation of the franchise relationship. The district court's order dated November 19, 1984, denying injunctive relief stated that the franchise agreement had expired on November 9, 1984, thereby making the issue of Sun's attempted termination moot.
6. Although Rodgers submitted a proposed franchise agreement in time, Sun refused to consider or comment upon the proposal. On December 12, 1984, Rodgers amended his complaint to add a count seeking on injunction against Sun's "unreasonable non-renewal of his franchise." In its memorandum and final order dated January 23, 1985, the court found that Sun failed to meet its burden under the PMPA of going forward with evidence indicating that Rodgers would fail to comply with the proposed agreement. Consequently, the court enjoined Sun from disturbing the franchise relationship in any way for three years.
7. Sun raises four issues on appeal. First, Sun alleges that after the court found that the outages were Rodgers's fault, were events relevant to the franchise agreement, and reasonable grounds for Sun to terminate or refuse renewal, the district court erred in not allowing Sun to terminate under PMPA § 2802(b)(2).*fn5 Second, Sun claims that because the parties extended the franchise agreement until final judgment, the district court erred in holding that the franchise agreement expired and in requiring the parties to treat the case as one of failure to renew rather than termination. Third, Sun believes that the district court abused its discretion in allowing Rodgers an opportunity to submit a proposal concerning the continuation of the franchise relationship after the court found that "the evidence supports . . . [Sun's] refusal to renew the franchise relationship." Finally, Sun also believes that the court abused its discretion by extending the terms of the original franchise agreement for an additional three years. We will not address each claim, as we find out resolution of the first issue dispositive of the remaining three.
8. Sun claims that PMPA § 2801(b)(2)(A), which permits termination or nonrenewal for failure to comply with a reasonable and material provision of the franchise, allows it to terminate Rodgers's franchise. Because the franchise agreement states that "the resale by Dealer of Company's branded motor fuels is the essence of this Agreement," Sun maintains that Rodgers's repeated gasoline outages violated the essence of the franchise agreement. Rodgers responds that § 2802(b)(2)(A) does not apply because he did not violate any specific provision of the franchise agreement. Indeed, the district court expressed serious doubt as to whether or not Rodgers's fuel outages could provide the basis for franchise termination "in view of Sun's knowledge of [Rodgers's past fuel outages] before entering into the franchise and an election in the face of such knowledge not to include a running out of fuel provision . . . [in] the franchise contract." This finding clearly prohibits Rodgers's termination under PMPA § 2802(b)(2)(A) or (B), because both sections require the franchisee to violate some provision of the franchisee agreement. We cannot say that this finding is erroneous.
9. Even if this finding is correct, we conclude that Sun is still entitled to terminate under PMPA § 2802(b)(2)(C). This section provides for termination or nonrenewal after the "occurrence of an event . . . relevant to the franchise relationship" if, as a result of the event, termination or non-renewal is reasonable. The court found both these elements present when it ruled on November 14th that Rodgers's inability to maintain adequate fuel supplies an event "relevant to the relationship" and a reasonable ground, on the record, to refuse renewal. Because the district court established that the legal standard for termination or non-renewal under § 2801(b)(2)(C) is satisfied, we conclude that Sun's termination of Rodgers's franchise is justified.*fn6
10. Because we find Sun entitled to terminate Rodgers's franchise, we need not to decide whether the district court abused its discretion in allowing Rodgers to submit a proposed franchise agreement and in extending the original franchise agreement for three years. We take notice, however, that the district court's power to grant equitable relief pursuant to PMPA § 2805(b)(1)*fn7 applies only where the court finds that the franchisor failed to comply with PMPA § 2802 or § 2803. When the district court gave appellee two weeks to submit a proposed franchise agreement to Sun, it had not yet found that Sun violated any PMPA requirements. The district court therefore did not have the power to grant any equitable relief.
11. Congress passed the PMPA in 1978 in recognition of "the disparity of bargaining power which exists between the franchisor and the franchisee" in the gasoline industry. Sun Reforming and Marketing Co. v. Rago, 741 F.2d 670, 672 (3d Cir. 1984). Although the Act's primary goal is to provide protection to franchisees, it also provides for "the legitimate needs of a franchisor to be able to terminate a franchise . . . based upon certain actions of the franchisee, including certain failures to comply with contractual obligations . . . ." Id. at 673. Where the district court finds, as it did here, that the franchisor had adequate grounds under the PMPA to terminate or refuse to renew the franchise, it must permit the franchisor to exercise its business judgment. Only in those circumstances prescribed by the Act may the court intervene to restore the equities of the bargaining relationship.
12. Accordingly, we will reverse the district court's order and direct the entry of judgment for appellant.