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Slatky v. AMOCO Oil Co.

filed: February 9, 1987.

SLATKY, JOHN
v.
AMOCO OIL COMPANY; JOHN SLATKY, APPELLANT



Appeal from the United States District Court for the Middle District of Pennsylvania -- Scranton, D.C. Civil No. 85-1122.

Author: Mansmann

Opinion OF THE COURT

Before: BECKER and MANSMANN, Circuit Judges, and TEITELBAUM, District Judge*fn*

MANSMANN, Circuit Judge.

The sole question we must decide on this appeal is whether Amoco's offer to sell its fully equipped service station to John Slatky, the present franchisee, made in conformity with Amoco's general practice for selling property, fulfills the franchisors' statutory obligation to make a "bona fide offer" under the Petroleum Marketing Practices Act ("PMPA"), 15 U.S.C. §§ 2801-2841. We hold that Amoco's offer was bona fide as a matter of law, and we will affirm the judgment of the district court.

I.

A.

Since September of 1977 the plaintiff, John Slatky ("Slatky"), has been operating a retail gasoline service station under a franchise relationship with the Amoco Oil Company ("Amoco"). In May, 1985, Amoco notified Slatky of its determination that it would be uneconomical to renew Slatky's lease and franchise agreement. Amoco then offered to sell the property to the franchisee. Amoco's final selling price was $256,300; plus an additional $50,000 for the pumps and underground tanks. Slatky, after obtaining an independent appraisal of the market value of the property including the pumps and underground tanks at $158,000, informed Amoco that its sale price was too high. When Amoco refused to negotiate further over the sale price, the plaintiff brought suit seeking damages and equitable relief in the form of a mandatory injunction which would force Amoco to make a bona fide offer pursuant to the PMPA, which governs the relationship between the parties. See 15 U.S.C. § 2802(b)(3)(D)(iii).

B.

Title I of the PMPA was enacted by Congress to remedy the disparity of bargaining power which enabled a petroleum franchisor to obtain the right to terminate a franchise relationship for minor contract violations or changes in circumstances. Evidence at Congressional hearings demonstrated that franchisors used the prospect of nonrenewal to compel franchises to comply with the franchisor's marketing policies, and frustrated the reasonable renewal expectations of franchisees through arbitrary or discriminatory cancellations. See generally, S. Rep. No. 731, 95th Cong., 2d Sess. 17-19, reprinted in 1978 U.S. Code Cong. & Ad. News 873, 875-77 (hereinafter cited as "Senate Report").

IN order to strengthen the bargaining position of franchisees, Congress drafted Title I to prohibit a franchisor from terminating or failing to renew a franchise agreement except on grounds specified in the statute. The statute also requires written notice of the franchisor's intent to terminate or fail to renew. 15 U.S.C. § 2804(a).

The legislative history of the PMPA recognizes an essential legislative purpose to provide statutory grounds for termination and nonrenewal which would not be "so broad as to deny franchisees meaningful protections from arbitrary or discriminatory terminations and nonrenewals or to prevent fulfillment of the reasonable renewal expectations of the franchisees." Senate Report at 18.

A competing legislative concern was expressed for "the legitimate needs of a franchisor to be able to terminate a franchise or not renew a franchise relationship based upon certain actions of the franchisee." Id. at 19. Congress also recognized the particular importance of providing "adequate flexibility so that franchisors may initiate changes in their marketing activities to respond to changing market conditions and consumer preferences." Id.

Statutory grounds for termination or nonrenewal reflect Congress' attempt to strike a balance among these competing concerns. Permissible grounds for either termination or nonrenewal include specific courses of conduct of the franchisee, events such as fraud or bankruptcy, and agreement of the parties, or the franchisor's determination to withdraw from the geographic area. See 15 U.S.C. § 2802(b)(2)(A)-(E). Customer complaints, failure of the franchisee to operate the franchise in a safe and sanitary manner, and failure by the parties to agree to reasonable changes in the franchise agreement are also grounds for nonrenewal. See 15 U.S.C. § 2802(b)(3)(A)-(C). A franchisor may also fail to renew a franchise if he decides "in good faith" and "in the normal course of business" to convert the premises to another use, to materially alter the premises, to sell the premises, or that the franchise is uneconomical. See 15 U.S.C. § 2802(b)(3)(D). The parties agree that Amoco's determination not to renew was proper and that Slatky received the requisite notice.

C.

We turn now to the statutory section in dispute here. The PMPA provides that once a franchisor has made an economic determination not to renew a franchise agreement in accordance with the statute and has notified the franchisee of its decision not to renew, the franchisor must make to the franchisee a "bona fide offer" to sell or otherwise transfer the franchisor's interest in the marketing premises or grant a right of first refusal of an offer made by another. 15 U.S.C. § 2802(b)(3)(D)(iii).

The parties agree that the PMPA places upon the franchisor the burden of proving its compliance with the statutory requirements including the fact that its offer was "bona fide." The parties part company over the definition of "bona fide" to be applied here.

After a bench trial, the district court rendered judgment for Amoco.*fn1 In seeking to ascertain the correct legal standard to apply, the district court relied on our decision in Robertson v. Mobil Oil Corporation, 778 F.2d 1005 (3d Cir. 1985), in finding that Amoco's offer to Slatky was bona fide. In Robertson we defined bona fide in the context of a different section of the PMPA, namely § 2802(b)(3)(B) which allows termination or nonrenewal of a franchise based on "bona fide" customer complaints. We there defined a bona fide complaint as "sincere and having a reasonable basis in fact." Id. at 1008.

The district court concluded that Amoco's offer was reached in a reasonable manner, in the normal course of business, by Amoco's employees who appraise any property Amoco intends to buy, sell, or lease and who followed procedures normally used for evaluating any of Amoco's property for sale. The court found that a request by Amoco for its real estate manager to reappraise the property resulted in a higher valuation but found no evidence that the appraiser was directed to increase the amount of the appraisal. The court relied upon these findings in concluding that the offer had a reasonable basis in fact.

The district court made no finding of fact regarding whether the offer approached the fair market value of the marketing premises as determined by an independent appraisal, but the court found the offer to be sincere in that the property was offered at what Amoco believed was the fair market value. The court rejected the argument of the plaintiff that in order for the franchisor to meet its statutory obligation of proving a bona fide offer under the PMPA, the franchisor must demonstrate that its offer equals or approaches a fair market value as determined by an independent appraiser.

On appeal, the plaintiff argues that the district court erred first in finding that Amoco's valuation procedures were reasonable, and second, in applying a legal standard which did not require an independent consideration of the fair market value of the marketing premises.

Our review in cases of statutory construction is plenary. Chrysler Credit Corporation v. First National Bank Trust Company of Washington, 746 F.2d 200, 202 (3d Cir. 1984); Universal Minerals, Inc. v. C.A. Hughes & Co., 669 F.2d 98, 101-02 (3d Cir. 1981). Findings of fact should stand unless clearly erroneous. See Leeper v. United States, 756 F.2d 300, 308 (3d Cir. 1985).

II.

Neither the statute itself nor the legislative history of the PMPA provides us with an explicit definition of "bona fide." In Robertson we arrived at a definition of bona fide suited to the particular statutory purposes of the PMPA -- namely, that Congress intended by "bona fide" to mean "sincere and having a reasonable basis in fact." Robertson, 778 F.2d at 1008. Our present task is to determine precisely what out Robertson definition requires in the context of offers to sell leased marketing premises pursuant to § 2802(b)(3)(D)(iii) of the PMPA.

The avowed purpose of Title I of the PMPA "is the establishment of minimum Federal standards governing the termination and nonrenewal of franchise relationships for the sale of motor fuel by the franchisor or supplier of such fuel." Senate Report at 15. Congress implemented its objective primarily by clearly delineating the grounds on which franchisors may terminate or refuse renewal of an existing franchise. See 15 U.S.C. § 2802. As we discussed above, the remedial scheme of the statute attempts to balance the franchisee's relative lack of bargaining power and reasonable renewal expectations against the legitimate property rights and economic interests of the franchisor. See Senate Report at 18-19.

The position of § 2802(b)(3)(D)(iii) in the statutory remedial scheme suggests that the franchisor's decision as to an offering price should be subject to a standard of intent similar to that which governs economic determinations which may support a decision not to renew a franchise. Under the PMPA, the requirement to offer the property for sale is triggered by the franchisor's reliance upon grounds for nonrenewal set forth in § 2802(b)(3)(D), which involve economic decisions regarding marketing strategy or recommitment of resources.*fn2 There is nothing in the statute to indicate that compliance with § 2802(b)(3)(D)(iii) demands anything more than what is required for compliance with the sections which trigger its applicability. Under this section, the purely economic interests of the franchisor are determinative of his nonrenewal rights under the PMPA. See § 2802(b)(3)(D)(I)-(IV). The standard governing those economic decisions is that they be made "in good faith and in the normal course of business." Id.

Moreover, the provision in § 2802(b)(3)(D)(iii)(II) -- that the franchisor must "offer[] the franchise a right of first refusal . . . of an offer, made by another, to purchase such franchisor's interest in such premises" -- contemplates that the franchisor might actively solicit bids or offer the marketing premises at a given price to the public at large. It is clear that the franchisor would accept an offer from someone other than its franchisee only if that offer translated into a value which exceeded the return the franchisor expected to obtain from the alternative uses to which it might put the property.

It is likewise clear that potential purchasers, particularly comparatively small independent operators like Slatky, might not be able to derive a return on investment comparable to that of a large franchisor by virtue of the franchisor's ability to exploit economies of scale and other synergistic effects which might emanate from vertically integrated enterprises like Amoco.

In short, we find nothing in the PMPA which requires the franchisor to offer its interest in the marketing premises to a current franchisee at a price which is any less than the franchisor would demand from a third party purchaser. So long as the franchisor arrives at a selling price through the procedures it would normally employ in contemplating a sale of its property, the franchisor satisfies our Robertson requirements of a sincere offer reasonably based in fact.

The legislative history of the PMPA clearly indicates that the drafters considered and rejected the suggestion that the standard governing economic decisions on nonrenewal should be one of objective reasonableness:

At this point it is appropriate to note that considerable debate has focused upon recognition of so-called "reasonable business judgments" of the franchisor as grounds for termination or non-renewal. This standard has not been adopted by the committee. Instead, a two-fold test has been utilized to judge certain specified determinations including that of market withdrawal.

One test is whether the determination was made "in good faith". This good faith test is meant to preclude sham determinations from being used as an artifice for termination or non-renewal. The second test is whether the determination was made "in the normal course of business". Under this test, the determination must have been the result of the franchisor's normal decisionmaking process. These tests provide adequate protection of franchisees from arbitrary or discriminatory termination or non-renewal, yet avoid judicial scrutiny of the business judgment itself. Thus, it is not necessary for the courts to determine whether a particular marketing strategy, such as a market withdrawal, or the conversion of leased marketing premises to a use other than the sale or distribution of motor fuel, is a wise business decision.

Senate Report at 37.

Congress clearly intended that in considering the economics of renewal, the franchisor will consider profitability in the broad sense of return on investment. Id. When Congress desired that the franchisor be influenced by interests other than his own, it clearly so provided. For example, the statute makes clear that a franchisor may not consider the alternative of retail operation for its own account when considering the economics of termination or nonrenewal. See 15 U.S.C. §§ 2802(b)(2)(E)(ii) and (b)(3)(D)(ii). These provisions address the concern expressed by the co-sponsor of the House bill that the desire of the major oil refiners to operate the stations as retail outlets resulted in their pressuring their franchisees to sell out or face stiff increases in their rent. See 123 Cong. Rec. H10,385 (daily ed. Apr. 5, 1977) (statement of Rep. Conte).

No such express limitation governs the franchisor's determination to sell the property or convert it to another use. The PMPA places no other limitations on franchisors' economic decisions as to what use to make of their property. Furthermore, the legislative history makes clear that if renewal is likely to be uneconomical apart from considerations of alternative methods of operation, Congress did not intend the franchisor to be precluded from operating the premises through their own employees or agents. See Senate Report at 37.

A decision regarding the offering price for property is an economic determination not unlike those determinations which may support a decision not to renew a franchise. In fact, both decisions are governed by the same statutory section and there is nothing to indicate that the franchisor is to be given less flexibility to act in his own economic interest when determining a selling price for the franchise property than when determining in the first instance to commit the property to another use, to remodel it or to sell it. Congress gave the franchisor the virtually unrestricted right to consider only its own economic interest in determining not to ...


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