Fuel Marketing & Petroleum Marketing Practices Act

Update Abby Risner, Greensfelder, Hemker & Gale, P.C.

American Fuel & Petrochemical Manufacturers General Counsels’ Educational Forum

October 4, 2016

Overview of Topics

• PMPA Update

• UCC §2-305 / Pricing Cases

• Growth of Class Actions

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State of the Industry: Points for Consideration

• What challenges is the business facing? • What changes are occurring in the business? • How are parties handling these challenges given

the economic issues? • How will these challenges creating new trends in

the industry?

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PMPA

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PMPA 101

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The PMPA is Triggered When There is …

(1) A contract relationship between one of the following: • a refiner and a distributor; • a refiner and a retailer; • a distributor and another distributor; OR • a distributor and a retailer

(2) The contract is for the purchase of branded motor fuel from the refiner or for the resale of such fuel to the motoring public

• Or at least associated with a brand or trademark (3) The franchisor terminates or non-renews the franchisee

• The PMPA applies only to terminations or non-renewals!

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The PMPA Does NOT Apply to:

• Ancillary Agreements – Not all contracts between a refiner and distributor

or dealer qualify for PMPA protection. • Related Convenience Store Franchises

– There is a split of authority on whether the convenience store franchise brand is protected

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Grounds for Termination or Non-Renewal

• Failure to comply with a provision that is reasonable and of material significance to the franchise relationship

• Failure to exert good faith efforts to carry out the provisions of the franchise

• Reasonable termination or nonrenewal based on the occurrence of an event relevant to the franchise relationship

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Occurrence of an Event Relevant to the Franchise Relationship

1. Fraud or criminal misconduct 2. Declaration of bankruptcy or judicial

determination of insolvency 3. Continuing severe physical or

mental disability for at least 3 months rendering the franchisee unable to continue proper operation of the marketing premises

4. Expiration of an underlying lease (see next slide)

5. Condemnation or other taking of the marketing premises pursuant to the power of eminent domain

6. Loss of the franchisor's right to use the trademark

7. Destruction (other than by the franchisor) of all or a substantial part of the marketing premises

8. Failure to pay money due to franchisor 9. Failure to operate the marketing

premises for 7 consecutive days (or a lesser period under certain circumstances)

10. Willful adulteration, mislabeling, or misbranding or other trademark violations

11. Knowing failure to comply with federal, state, or local laws or regulations

12. Conviction of any felony involving moral turpitude.

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Additional Grounds for Termination or Non-Renewal

• Franchisor decides to sell or materially alter or replace the premises

• Expiration of the underlying lease, but only if franchisor has first met specific requirements including special notice of underlying lease

• Market withdrawal • The failure to agree to changes to the franchise • The receipt of numerous bona fide complaints from

consumers • Failure to operate in a clean and safe manner

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Notice Requirements

• Default notice requirement: 90 days • Notice must be written, posted by certified mail, or

personally delivered to the franchisee • Must contain a statement of the intent to terminate

or non-renew with the reasons supporting the termination or non-renewal

• Must state the day termination or non-renewal will take effect

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Renewals

• Minimum Terms

– All renewals must be for at least three years

• Unilateral Extension – Franchisor can unilaterally extend a franchise without

triggering a renewal

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PMPA’s Relationship to State Laws

• Preemption – State laws that attempt to govern the grounds for

termination or non-renewal are preempted, but those that only incidentally affect franchise termination or non-renewal are not preempted

• Assignments • Deed restriction issues • State Franchise Laws • Relationship to the UCC

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Common Litigation Issues

• One (1) Year statute of limitations • Litigation consequences of right to cure and

“stale” violations • More lenient preliminary injunction standard for

franchisees • Enhanced remedies

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Recent Developments

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Termination Notices and Adequacy of Grounds Supporting Termination

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BP West Coast Products v. Crossroad Petroleum (S.D. Cal. 2016)

• Loss of underlying lease—hundreds of PMPA agreements terminated

• Dealers claimed: – Insufficient notice of underlying lease because did not

receive actual copy – Termination was pretext for market withdrawal

• Holding: Terminations valid under PMPA

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Scarsdale Cent. Serv. Inc. v. Cumberland Farms, Inc.

(S.D.N.Y. Feb. 13, 2015)

• Franchisor decided to sell the premises • Court held:

a.In good faith and in the normal course of business? Yes.

b.ROFR/BFO requirements still met where offer from third party included tank removal

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Amphora Oil & Gas Corp. v. Cumberland Farms, Inc.

(E.D.N.Y. Oct. 19, 2015)

• Loss of underlying lease • Court held:

a. Franchisee’s right to assignment of ground lease limited by franchisor’s right to secure release from landlord

b. Also irrelevant that franchisor gave notice to LL it would not renew ground lease before it offered to assignment option to franchisee

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No Wrongful Termination When Franchisee Failed to Pay for Fuel or Rent and Failed to Operate Station

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Wynn v. Lukoil N.A., LLC (E.D. Pa. Apr. 29, 2015)

• Round 1: Franchisee’s motion for preliminary injunction

• Injunction denied – Untimely under PMPA – Balance of hardships weighed against franchisee

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Wynn v. Lukoil N.A., LLC (E.D. Pa. Aug. 28, 2015)

• Round 2: Lukoil’s motion for summary judgment • Lukoil properly terminated under the PMPA

– 12 days notice was sufficient in these circumstances

• Release signed by franchisee was valid

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MS & BP, LLC v. Big Apple Petroleum, LLC (E.D.N.Y. May 8, 2015)

• Claim for failure to pay the franchisor in a timely manner all sums due

• Held: a. Notice timely only for events within 120 days prior

to NOT b. Fact of security deposit doesn’t save nonpayment

grounds c. Onus remains on franchisee to maintain funds for

payment

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Hillmen, Inc. v. Lukoil N.A., LLC (E.D. Pa. June 26, 2015)

• Motion for summary judgment — Granted for Lukoil

• Lukoil properly terminated under the PMPA – Franchisee failed to pay

• Breach and fraud claims that were intimately intertwined with termination claim were preempted by PMPA

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Light Petroleum, Inc. v. ExxonMobil (9th Cir. 2015)

• Claim: Exxon’s sale of nearly 400 stations to Circle K violated CA Business & Professions Code §20999.25(a) because Exxon didn’t make BFO to purchase to franchisees

• Ninth Circuit affirmed SJ for Exxon and Circle K • Held: terms of offers of sale, as a whole, were

commercially reasonable, thus, BFOs to sell

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PMPA Preemption

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Lukoil N.A. LLC v. Turnersville Petroleum Inc.

(D.N.J. Apr. 16, 2015)

• Lukoil moved to dismiss franchisee pricing counterclaims on PMPA preemption grounds. Claims made:

a. NJ UCC statute; b. Breach of contract, c. Breach of the duty of good faith and fair dealing; d. NJ franchise act statutory claims

• Held: not preempted - applying “intimately intertwined” test, breaches were during the life of the franchise agreement, not about the termination event

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UCC§2-305 and Pricing Cases

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Recent Developments

Federal Antitrust Risks Associated with Fuel Distribution Kentucky v. Marathon Petroleum Co.

(W.D. KY June 8, 2016) – MPC owns only refinery in KY and is largest fuel

supplier in KY – MPC’s wholesale RFG market share is 90% in

Louisville and 95% in Northern KY

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KY v. Marathon (cont’d)

• KY AG sues MPC on behalf of retail consumers under state antitrust act and federal Sherman Act/Clayton Act

• AG alleges MPC uses the agreements to restrain trade

• AG alleges that wholesale and retail prices are substantially higher than those found in comparable competitive markets

• MPC files a Motion to Dismiss

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KY v. Marathon (cont’d)

• Lack of Standing: MPC argues Illinois Brick indirect purchaser rule bars KY’s claims, since retail consumers buy gas from Speedway, not MPC

• Court denies the motion: invokes “control

exception,” citing KY’s allegations that Speedway is MPC’s wholly-owned subsidiary

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KY v. Marathon (cont’d)

• Sherman Act § 1 claims – KY argued MPC’s use of exchange and supply

agreements, and deed restrictions = per se violation

– Court: Not a per se violation – But KY alleged rule of reason violation, given

MPC’s high market share and region’s supracompetitive retail prices

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KY v. Marathon (cont’d)

Sherman Act § 2 Claims

• Element 1: possession of monopoly power

• Element 2: use of that power to foreclose competition, gain competitive advantage or destroy competitor

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KY v. Marathon (cont’d)

Deed Restrictions • MPC made common sense argument

• Court: MPC speculating, KY gets discovery b/c it’s

“plausible that deed restrictions on a significant number of retail locations would harm overall competition.”

• KY alleged MPC has market power

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KY v. Marathon (cont’d)

Clayton Act § 3 Claim:

• Element 1: exclusive dealing

• Element 2: foreclosure of or “substantially lessened” competition

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KY v. MPC: Lessons & Impact

• Unique or rare allegations/facts – Limited RFG Product Market – Unique Geographic Market with dominant position

(90-95% RFG plus only refinery) in product market – Procedural context: MTD not MSJ

• One size doesn’t fit all

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South Gas, Inc. v. ExxonMobil (D.N.J. Feb. 29, 2016)

• Multiple NJ dealers (96 stations) sued EM for –

– Secondary line price discrimination in violation of Robinson-Patman Act (RPA) based on EM zone pricing to dealers

– Violating NJ Franchise Practices Act (NJFPA) by imposing unreasonable standards of performance to drive dealers out of business

– Breach of contract provisions stating that dealer in control of day-to-day operations and are free to set own retail prices

– UCC § 2-305 bad faith pricing – Violating NJ Unfair Motor Fuels Practices Act by discriminating in

price • EM filed a Motion to Dismiss

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South Gas (cont’d)

RPA Claim Court rejects EM’s argument because there are allegations that:

• EM controlled dealer profit margins via WAM • EM forced dealers to lower retail b4 EM would lower DTW • EM controlled other costs (rent & tech) that were factored into

DTW • EM controls volume of gas dealers can buy and can set DTW

“at their [EM’s] whim.”

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South Gas (cont’d)

• State franchise relationship & pricing laws • NJFPA “unreasonable standards of performance”

– Rejects argument that relationship must be terminated (PMPA preemption)

• Lesson: Risks associated with selling fuel directly in NJ

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South Gas (cont’d)

Breach of Contract • Court held sufficient to state a claim:

– Dealers’ allegations that WAM and zone pricing, as well as EM’s requiring them to lower their retail price before EM would lower DTW price

– Breached provisions that gave dealers right to set their own prices

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Price Zones

• Cain v. Chevron: Price zones are commercially reasonable under UCC

• Callahan v. Sunoco, Inc., 2005 U.S. Dist. LEXIS 7395 (E.D. Pa. 2005) (“we cannot find that zone pricing is unreasonable per se [absent] any evidence that Sunoco’s competitors set prices in other ways”)

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§ 2-305 Risks

• Dealers must show that motor fuel prices were – (a) higher than charged other similarly

situated dealers; i.e., dealers in the same price zones; or

– (b) outside the range of dealer prices charged by other refiners in the relevant geographic market

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§ 2-305 Risks

• Same COT: Allegations regarding purchasers in other classes of trade or who have different contractual buying arrangements, for example, purchasers other than branded DTW supplied dealers, are irrelevant.

• So what happens when try to compare to different classes or unbranded…

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Hogan v. BP West Coast Products LLC (California)

• 2015 bellwether trial • Dispute about jury instruction on reasonableness of price • Court instructed the jury that prices had to be set in

accordance with the implied covenant of good faith and fair dealing and commercially reasonable – Commercially reasonable: find BPWCP’s DTW prices

reasonable if they were within the range of prices charged by other refiners to other “branded direct supply dealers” or those contracted to purchase gas provided directly from refiners, such as Shell and Chevron

• Jury verdict for BPWCP on pricing claim

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State Motor Fuel Acts & Other Pricing Regs

• MO, FL, AL, NC, UT Motor Fuel Marketing Acts – Discriminatory and below cost pricing with uncertain

elements • Injury to competition / Recoupment

• State pricing statutes of general applicability; e.g., Oklahoma below cost pricing statute

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State Price Posting Regs

• Statutes, regulations • Vary by State

• Example: Oregon

• Relationship to: Loyalty programs, rebates

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Deed Restrictions / ROFR

• Deed restrictions / brand covenants – Impact as changes in brand, sale of

markets/assignments

• As businesses change (sell, purchase), be aware of potentially triggering statutory ROFRs

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Rise of Class Actions in Energy Industry

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Class Actions in the Energy Industry

• Pricing • Antitrust • Consumer Examples: Temperature Correction class actions, Persian Gulf class action

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Class Actions in SCOTUS

Campbell-Ewald Co. v. Gomez: Prevents picking off a putative class representative in an effort to avoid a class action

Tyson Foods Inc. v. Bouaphakeo: Plaintiffs could use statistical inferences to prove their case

Spokeo Inc. v. Robins: Plaintiff must suffer an injury-in-fact that is concrete and particularized

Previous years: class arbitration waivers

Next term: more class actions…

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Conclusion: State of the Industry

• Developments in how parties are handling the economic times

• Changes in the business models in the industry – Pricing, exit from markets, sale of stations, to retail,

out of retail

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Questions?

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Abby L. Risner | alr@greensfelder.com

Abby Risner is an officer at Greensfelder, Hemker & Gale, P.C. in St. Louis. In her complex commercial litigation and class action practice, she defends energy companies, franchisors, manufacturers and distributors.

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