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O'Shea v. AMOCO Oil Co.

filed as amended october 6 1989.: September 25, 1989.

TIMOTHY O'SHEA T/A TIM'S AMOCO, APPELLANT
v.
AMOCO OIL COMPANY, APPELLEE



On Appeal From the United States District Court for the District of New Jersey, D.C. Civil No. 87-4155.

Sloviter, Becker, Circuit Judges and Fullam, District Judge.*fn*

Author: Becker

Opinion OF THE COURT

BECKER, Circuit Judge.

This appeal addresses the vexing question whether Title I of the Petroleum Marketing Practices Act ("PMPA"), 15 U.S.C. §§ 2801-06 (1982), prevents a petroleum company franchisor from terminating a gas station franchisee who refuses to comply with a company marketing strategy that demands that the gas station remain open 24 hours a day. The question is a recurring one, apparently because many service station operators find that they operate at a significant loss between midnight and 6:00 a.m.

Title I of the PMPA provides to petroleum franchisees a civil cause of action for wrongful termination. See id. § 2805(a). The statute provides that it is unlawful for a petroleum franchisor to terminate a franchisee except in certain specified situations. See id. § 2802. The situations relevant to the instant case are as follows: (1) a franchisee may be terminated if it fails "to comply with any provision of the franchise, which provision is both reasonable and of material significance to the franchise relationship," id. § 2802(b)(2)(A); and (2) a franchisor may terminate a franchisee if there is "[a] failure by the franchisee to exert good faith efforts to carry out the provisions of the franchise," but only if the franchisee is given a reasonable opportunity to cure but fails to cure, id. § 2802(b)(2)(B).

The instant case involves the question whether Amoco Oil Company ("Amoco") violated the PMPA by terminating its franchisee Timothy O'Shea ("O'Shea"). In July 1987, Amoco notified O'Shea that it was terminating him for failing to comply with the provision of the franchise agreement that required him to operate his station 24 hours a day. O'Shea brought suit in the district court for the District of New Jersey, alleging that the termination violated both the PMPA and the New Jersey Franchise Practices Act ("NJFPA"), N.J.Stat.Ann. § 56:10-1 to 10-15 (West 1989). However, after a bench trial, the district court found that the termination was permitted under either of the two provisions of the PMPA set forth above and further that O'Shea's NJFPA claim was preempted by the PMPA. O'Shea raises four major arguments on appeal.

First, O'Shea claims that the district court erred in holding that his NJFPA claim was preempted. However, we need not reach the preemption issue because we conclude that O'Shea is barred from litigating his NJFPA claim by New Jersey's version of claim preclusion, labeled the "entire controversy doctrine." O'Shea had previously brought an unsuccessful state court action. Contending that the 24-hour provision was unenforceable as a matter of state contract law. O'Shea was required by the entire controversy doctrine to bring his NJFPA claim as part of that suit, on penalty of waiver.

O'Shea's second contention is that the district court erred in holding that the termination was proper pursuant to PMPA section 2802(b)(2)(A), which provides that a franchisee may be terminated if it breaches a reasonable and material provision of a franchise agreement. Because we find that O'Shea's termination was proper under section 2802(b)(2)(B), we need not reach this issue.

O'Shea's third and fourth contentions are that the district court erred in holding that the termination was proper under PMPA section 2802(b)(2)(B), which provides that franchisees may be terminated for failure "to exert good faith efforts to carry out the provisions of the franchise" if they are first given a reasonable opportunity to cure, and that, in any case, Amoco did not meet its burden of proving that O'Shea breached the franchise agreement. We agree with the district court that Amoco met its burden of proof on this issue at trial and that the termination was proper on this ground. We will therefore affirm the judgment of the district court.

I. BACKGROUND

A. Facts

In December 1985, O'Shea purchased a leasehold and signed a one-year franchise agreement with Amoco to operate an Amoco service station in Evesham, New Jersey. At the time that O'Shea assumed the lease and signed the agreement, the station had been operating 24 hours a day. As part of the franchise agreement O'Shea promised to continue to provide 24-hour service. He did so until February 1986, when an Evesham Township ordinance took effect that barred the sale of gasoline between midnight and six a.m. Amoco did not require O'Shea to operate on a 24-hour basis while the ordinance was in effect.

Amoco and O'Shea jointly brought suit in the New Jersey Superior Court challenging the constitutionality of the ordinance. In December 1986, O'Shea and Amoco renewed the franchise agreement under the same terms until November 30, 1989. On March 27, 1987, the Superior Court found the Evesham ordinance to be unconstitutional and thus unenforceable.*fn1 However, O'Shea did not resume 24-hour service.

On May 6, 1987, Amoco wrote to O'Shea requesting that he resume 24-hour operations within ten days. In response, O'Shea requested a meeting with Amoco, which was held on May 14, 1987. At the meeting, Amoco insisted that the station must be operated 24 hours a day and asked O'Shea to provide Amoco with a written plan of how he would resume full-time service. On May 22, 1987, O'Shea wrote to Amoco and advised that he would resume 24-hour service on June 22, 1987 by hiring high school students, who would then be on vacation, to fill the "graveyard-shift" positions.

In the meantime, O'Shea brought suit against Amoco in the Superior Court of New Jersey, asking that Amoco be enjoined from enforcing the 24-hour requirement in the franchise agreement because: (1) the agreement was signed while the Evesham ordinance was still in force; and (2) in response to O'Shea's objection to the inclusion of the 24-hour provision while the ordinance was in force, an Amoco representative had stated that corrections would be made to the agreement. On June 4, 1987, the Superior Court entered a temporary restraint against Amoco, preventing it from enforcing the 24-hour provision of the agreement. This restraint remained in effect until July 1, 1987.

On June 29, Amoco notified O'Shea that it had observed that the station was closed at 11:45 p.m. on June 22 and that O'Shea would be terminated if there were any further violations of the 24-hour provision. On July 1, a Superior Court judge vacated the restraint and set the case for summary trial in August. See Super.Ct., No. L-78390-87, trans. at 18 (July 1, 1987). On July 8, Amoco wrote to O'Shea terminating his agreement effective October 30, 1987. The letter alleged that O'Shea had breached the 24-hour provision of the contract as his station was not open on June 22, 1987, at 11:45 p.m, and not open on July 4, 1987, at 11:58 p.m. The letter further stated that this constituted a breach of a term of material significance and a failure by O'Shea to exercise good faith efforts to carry out the provisions of the franchise agreement.

On August 11, 1987, the Superior Court entered judgment in favor of Amoco, holding that the 24-hour provision of O'Shea's lease was valid and enforceable. See Super.Ct. Letter Op., No. L-78390-87 (Aug. 19, 1987), J.A. at 229-31. O'Shea did not appeal that decision. O'Shea resumed 24-hour operations in October 1987 and filed this action in the district court on October 5, alleging that his termination violated Title I of the PMPA, 15 U.S.C. § 2801-06. Amoco agreed to retain the status quo pendente lite; thus O'Shea is still operating the Amoco franchise.

B. The PMPA

Congress enacted Title I of the PMPA in 1978 in order to protect franchisees from exploitation by large petroleum companies. See S. Rep. 731, 95th Cong. 2d Sess. 17-18, reprinted in 1978 U.S.Code Cong. & Admin.News 873, 875-77 (hereinafter "Senate Report"). Congress determined that the oil company franchisors possessed disproportionate bargaining power vis-a-vis their franchisees because franchisees depend on the franchisors for their supply of gasoline and because the franchisors often control the premises upon which the franchisees operate. See id. Consequently, petroleum franchisees risk losing completely the return from their prior investments, and potentially their livelihood, if their franchise agreements are terminated. Congress also found that franchisors "had used their superior bargaining power and the threat of termination to gain an unfair advantage in contract disputes." Slatky v. Amoco Oil Co., 830 F.2d 476, 478 (3d Cir. 1987) (in banc). Congress therefore enacted legislation giving petroleum franchisees rights against termination and non-renewal of their franchises.

Title I of the PMPA provides in relevant part that "[except] as provided in subsection (b) of this section, . . . no franchisor engaged in the sale . . . of motor fuel in commerce may -- (1) terminate any franchise . . . prior to . . . the expiration date . . . stated in the franchise." 15 U.S.C. § 2802(a)(1). The relevant exceptions are as follows:

(2) For purposes of this subsection, the following are grounds for termination of a franchise. . . .

(A) A failure by the franchisee to comply with any provision of the franchise, which provision is both reasonable and of material significance to the franchise relationship. . . .

(B) A failure by the franchisee to exert good faith efforts to carry out the

provisions of the franchise, if --

(1) the franchisee was apprised by the franchisor in writing of such failure and was afforded a reasonable opportunity to exert good faith efforts to carry out such provisions. . . . .

Id. § 2802(b)(2).

The PMPA is not designed to eliminate the petroleum companies' ability to set their own marketing strategies or to prevent the companies from terminating franchisees in appropriate cases. As the Senate Report describes, "[legislation] in this subject area requires recognition of 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. . . ." Senate Report at 19. The PMPA is designed to accord flexibility to the petroleum companies to refine their marketing strategies and change them in response to changed conditions. Id. See also Darling v. Mobil Oil Corp., 864 F.2d 981, 983-84 (2d Cir. 1989) (describing the legislative history of the PMPA). ...


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