Filed: Apr. 26, 2011
Latest Update: Feb. 21, 2020
Summary: 1, About a third of the franchises owned their own land and, stations outright, while two-thirds leased their stations from Esso, as part of the franchise agreement.standard contract to Esso franchisees.that two more terms were unenforceable under Puerto Rico law.plaintiffs for such violations, id.
United States Court of Appeals
For the First Circuit
No. 09-2312
LUIS ALFREDO SANTIAGO-SEPÚLVEDA, ET AL.,
Plaintiffs, Appellants,
v.
ESSO STANDARD OIL COMPANY (PUERTO RICO), INC.;
TOTAL PETROLEUM PUERTO RICO CORPORATION,
Defendants, Appellees.
No. 09-2313
ENID MARGARITA FONSECA-MARRERO, ET AL.,
Plaintiffs, Appellants,
v.
ESSO STANDARD OIL COMPANY (PUERTO RICO), INC., ET AL.,
Defendants, Appellees.
____________________
No. 09-2330
HÉCTOR GIERBOLINI, ET AL.,
Plaintiffs, Appellants,
v.
ESSO STANDARD OIL COMPANY, ET AL.,
Defendants, Appellees.
____________________
APPEALS FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF PUERTO RICO
[Hon. Justo Arenas, U.S. Magistrate Judge]
Before
Torruella, Boudin and Lipez,
Circuit Judges.
Juan H. Saavedra Castro with whom Manuel Correa Márquez, Xana
Connelly, Correa, Collazo & Herrero, P.S.C., Carlos E. Montañez and
Carlos E. Montañez Law Office were on brief for appellants.
Mark A. Klapow with whom Howrey LLP, Angel E. Rotger Sabat and
Maymí, Rivera & Rotger, P.S.C. were on brief for appellee Esso
Standard Oil Company (Puerto Rico).
Lee Sepulvado-Ramos with whom Lady Cumpiano, Albéniz Couret-
Fuentes and Sepulvado & Maldonado, PSC were on brief for appellee
Total Petroleum Puerto Rico Corporation.
April 26, 2011
BOUDIN, Circuit Judge. Plaintiffs, who operated gas
stations as franchisees of Esso Standard Oil Co. ("Esso") in Puerto
Rico, sued Esso for alleged violations of Title I of the Petroleum
Marketing Practices Act ("PMPA"), 15 U.S.C. §§ 2801-2807 (2006 &
Supp. III 2010). The magistrate judge, who presided at trial with
the parties' consent, see 28 U.S.C. § 636(c)(1) (2006), denied
plaintiffs' request for injunctive relief and damages, and
plaintiffs now appeal. The facts are largely undisputed.
Esso operated as a supplier of gasoline in Puerto Rico
for over one hundred years; as of 2008, 161 stations sold
Esso-brand gasoline in Puerto Rico. These stations were operated
by independent franchise dealers under agreements with Esso that
authorized them to sell Esso's gasoline under Esso's trademark.
The franchise term was three years or longer for most plaintiffs,
although some plaintiffs had one-year trial franchises. In many
cases, Esso also provided the stations.1
In late 2006, Esso--having suffered losses in the market
for the five preceding years--began to consider leaving Puerto
Rico. After months of deliberation and negotiations, Esso decided
in March 2008 to sell its operations and assets to Total Petroleum
Puerto Rico Corp. ("Total"), a gasoline refiner and distributor
1
About a third of the franchises owned their own land and
stations outright, while two-thirds leased their stations from Esso
as part of the franchise agreement. This latter group leased the
land and premises to Esso and Esso leased it back to them as part
of the franchise agreement.
-3-
that at the time operated approximately ninety stations in Puerto
Rico. On March 17, 2008, Esso notified its franchisees of its
planned withdrawal from the Puerto Rican market, the sale of its
assets to Total, and the termination of its relationship with its
franchisees, effective September 30, 2008.
In late June and early July 2008, Total began to offer
Esso's franchisees contracts to serve as franchisees of Total.
Total uses a standard franchise model contract offered to potential
new franchisees and to existing franchisees whose contracts are
renewed. The standard contract is periodically updated, and had
been updated in 2007 and 2008; Total offered the then-current
standard contract to Esso franchisees.
In late August and early September 2008, five groups of
Esso franchisees, unhappy with the terms Total offered in its
franchise agreements, filed separate lawsuits in the federal
district court in Puerto Rico against Esso. The complaints sought
injunctive and declaratory relief under PMPA to prevent Esso from
terminating its contracts with plaintiffs, as well as damages for
Esso's alleged failure to comply with PMPA. Esso then pushed back
the termination date of its contracts to the end of October 2008.
The district court consolidated the lawsuits and referred
the cases to the chief magistrate judge, and the parties consented
to a bench trial before the magistrate judge. Three days of
hearings were held and ultimately the magistrate judge issued three
-4-
opinions.2 In the first, on October 18, 2008, he concluded that
Esso had complied with PMPA and denied plaintiffs' request for
injunctive relief. Santiago-Sepúlveda I, 582 F. Supp. 2d at 185.
All but two of the plaintiffs eventually agreed to accept
franchise agreements offered by Total. In a second opinion, on
June 23, 2009, the magistrate judge reaffirmed that Esso's actions
had complied with PMPA, but, explaining that the question remained
whether the individual contract terms in Total's franchise
agreement complied with PMPA, he proceeded to find three specific
terms illegal under local law but severable under the franchise
contract's severability clause. Santiago-Sepúlveda II, 634 F.
Supp. 2d at 211-12.
Finally, on reconsideration, the magistrate judge issued
his third opinion on July 30, 2009. In it, he reaffirmed that the
terms found illegal in the previous opinion were severable and held
that two more terms were unenforceable under Puerto Rico law.
Santiago-Sepúlveda III, 638 F. Supp. 2d at 200, 204-05. He
thereafter entered a final judgment in favor of Esso and Total
(which had intervened to defend its franchise contract and its
acquisition of Esso's properties).
2
Santiago-Sepúlveda v. Esso Standard Oil Co. (P.R.) (Santiago-
Sepúlveda I), 582 F. Supp. 2d 154 (D.P.R. 2008), vacated in part,
No. 08-1950,
2009 WL 87586 (D.P.R. Jan. 12, 2009); Santiago-
Sepulveda v. Esso Standard Oil Co. (P.R.) (Santiago-Sepúlveda II),
634 F. Supp. 2d 201 (D.P.R. 2009); Santiago-Sepúlveda v. Esso
Standard Oil Co. (P.R.) (Santiago-Sepúlveda III),
638 F. Supp. 2d
193 (D.P.R. 2009).
-5-
Appeals, by several contingents of plaintiffs, followed.
We review factual findings made in the bench trial for clear error,
Monahan v. Romney, 625 F.3d 42, 46 (1st Cir. 2010); denials of an
injunction for abuse of discretion, García-Rubiera v. Calderón,
570
F.3d 443, 455-56 (1st Cir. 2009); and rulings on purely legal
issues de novo,
id. at 456. Because the framework for the judgment
under review is provided by PMPA, the first step is to outline the
relevant elements of the statute.
PMPA is a conventional dealer-protection statute limiting
the circumstances in which a motor fuel franchisor can terminate or
choose not to renew a franchise relationship. See Chestnut Hill
Gulf, Inc. v. Cumberland Farms, Inc., 940 F.2d 744, 746 (1st Cir.
1991). This statute, like most others at both the federal and the
state level, rests on the perceived "disparity of bargaining power
between franchisor and franchisee," Veracka v. Shell Oil Co.,
655
F.2d 445, 448 (1st Cir. 1981) (Breyer, J.), coupled with concerns
said to be peculiar to franchising, Draeger Oil Co. v. Uno-Ven Co.,
314 F.3d 299, 299 (7th Cir. 2002) (Posner, J.); see 123 Cong. Rec.
10,386 (1977) (statement of Rep. Mikva).
Under PMPA, a franchisor may terminate the relationship
on any of five specified grounds, 15 U.S.C. § 2802(a),
(b)(2)(A)-(E), and the one pertinent here--subsection (E)--permits
termination if a franchisor determines
in good faith and in the normal course of
business to withdraw from the marketing of
-6-
motor fuel through retail outlets in the
relevant geographic market area in which the
marketing premises are located.
There are other restrictions and requirements, such as proper
advance notice, id. §§ 2802(b)(1)(A), 2804(b)(2), but they are not
at issue on this appeal.
However, for withdrawals under subsection (E), there are
further conditions, 15 U.S.C. § 2802(b)(2)(E)(iii), specifying
alternative means to preserve the franchisee's operations; the
statutory alternative chosen by Esso here allowed it to sell the
premises it leased to its dealers to another franchisor, so long as
the purchasing franchisor-to-be
offers, in good faith, a franchise to the
franchisee on terms and conditions which are
not discriminatory to the franchisee as
compared to franchises then currently being
offered by such other person or franchises
then in effect and with respect to which such
other person is the franchisor.
Id. § 2802(b)(2)(E)(iii)(II). Whether this condition applies to
all of the dealers in this case is an open question but, given our
disposition, need not be resolved.3
3
The condition applies only to franchisees that occupy "leased
marketing premises," id. § 2802(b)(2)(E)(iii), and whether it
applies to those who own their premises but engaged in a double
lease arrangement (see note 1, above) is an open question. Compare
id. § 2801(1)(B)(i), 2801(9), with Barman v. Union Oil Co. of Cal.,
50 F. App'x 824, 829 (9th Cir. 2002) (unpublished). Further, by
its terms section 2802(b)(2)(E) is limited to franchise terms that
are three years or longer.
-7-
If a franchisor terminates the franchise relationship but
fails to comply with these requirements, its franchisees can sue it
for equitable relief, actual and exemplary damages, and attorney
and expert witness fees. 15 U.S.C. § 2805(a), (b), (d). When the
fact of termination is proved by the franchisee (and it is conceded
here), the burden falls on the franchisor to establish "that such
termination or nonrenewal was permitted" by PMPA. Id. § 2805(c).
Plaintiffs' first substantive contention is that Esso did
not comply with section 2802(b)(2)(E)(iii)(II) because (allegedly)
Total did not offer the former Esso dealers "franchise[s] . . . on
terms and conditions which are not discriminatory to the franchisee
as compared to franchises then currently being offered by [Total]
or franchises then in effect and with respect to which [Total] is
the franchisor." 15 U.S.C. § 2802(b)(2)(E)(iii)(II). In a
nutshell, plaintiffs allege on appeal that different Esso
franchisees were offered different contracts by Total.
For example, plaintiffs say that Total required some to
operate a convenience store, while others were not required to do
so, and those operating convenience stores also had to sign non-
compete agreements, while others did not. They also allege that
Total included a term in the franchise agreement--personal
supervision by the franchisee--that would make those franchisees
that operate multiple stations in default (an interpretation that
Total's marketing director denied in his own testimony).
-8-
Although plaintiffs made a discrimination claim below, it
was different from those urged on appeal. The argument made to the
magistrate judge was that the franchises offered to them were
different than the ones Total offered to its preexisting
franchisees, not that the terms offered to former Esso dealers
differed from each other. Absent plain error, which was not even
asserted on this issue, a claim not presented in the lower court is
not available on appeal. Bennett v. City of Holyoke, 362 F.3d 1,
6 (1st Cir. 2004); Beddall v. State St. Bank & Trust Co.,
137 F.3d
12, 22 (1st Cir. 1998).
As it happens, "Congress did not intend 'not
discriminatory' to mean that each service station operator must be
offered a franchise with identical terms. A franchisor must be
free to offer different terms at different franchise locations,
depending on the economic conditions and forecast for that area."
Ewing v. Amoco Oil Co., 823 F.2d 1432, 1438 (10th Cir. 1987).
Thus, to employ additional terms for franchisees with convenience
stores on the premises could well be legitimate so long as all of
Total's franchisees in this situation were offered similar terms.
But we need not pursue the subject.
Plaintiffs' next claim is that Total's offer of
franchises was not "in good faith," as section
2802(b)(2)(E)(iii)(II) requires, because the magistrate judge found
that some terms in the franchise contract violated state law and
-9-
struck the offending provisions. This claim raises questions not
only as to the meaning of "good faith" in section
2802(b)(2)(E)(iii)(II), but also the relationship between this
provision and other sections in PMPA that relate to the statute's
interaction with state law. 15 U.S.C. §§ 2805(f)(1)(B), 2806(a).
"Good faith" usually refers to a subjective intent or
motive that is legitimate rather than consciously evil or
dishonest. Esso Standard Oil Co. (P.R.) v. Monroig-Zayas, 445 F.3d
13, 18 (1st Cir. 2006) (quoting Esso Standard Oil Co. v. Dep't of
Consumer Affairs,
793 F.2d 431, 432 (1st Cir. 1986)) (construing
section 2802(b)(3)(A)). But just what must be done in good faith
by the new franchisor is less certain; and the phrase could be read
merely to afford some protection to the new franchisor in making an
offer that it honestly believed to be non-discriminatory.
Indeed, Congress emphasized that the good faith
requirement aimed only to protect franchisees from "arbitrary or
discriminatory" behavior, but otherwise to "avoid judicial
scrutiny" of the reasoning behind the franchisor's business
judgments. S. Rep. No. 95-731, at 37 (1978), reprinted in 1978
U.S.C.C.A.N. 873, 896. But the requirement could as easily be read
instead, or as well, to afford further franchisee
protection--pertinently, by disallowing an offer that might be non-
discriminatory but was structured to be unacceptable and intended
to provoke refusal.
-10-
A number of courts have construed the term in the latter
sense, and while the issue has not been adequately briefed, we will
assume for present purposes that such an offer would not be in good
faith.4 This might seem hard on the departing franchisor who alone
can be sued under PMPA and may have no easy way to judge the
subjective good faith of its successor; but the statute does aim to
keep the former franchisees in business and the sale of a business
involves various risks and there are various means for the seller
to protect against them.
However, no evidence suggests that Total devised the
franchise agreements in the hope that they would be rejected. The
magistrate judge found several provisions of the franchise
agreement unlawful under Puerto Rico law; but Total, even assuming
it shared that view, could easily have believed that the agreements
would be accepted by franchisees, old and new. The franchise
agreement was Total's standard model for renewing franchises for
its own dealers, and it was buying out Esso to expand its business.
4
See, e.g., Unocal Corp. v. Kaabipour, 177 F.3d 755, 767 (9th
Cir. 1999) (good faith requirement looks in part to whether terms
are used "'as a pretext to avoid renewal'" (quoting Valentine v.
Mobil Oil Corp.,
789 F.2d 1388, 1392 (9th Cir. 1986))); May-Som
Gulf, Inc. v. Chevron U.S.A., Inc.,
869 F.2d 917, 927 (6th Cir.
1989) (incoming franchisor found to act in good faith where its
actions demonstrated that it was "committed to timely renewal of
the plaintiffs'" contracts, and there was no evidence that it,
among other things, "drastically increased [the plaintiffs']
rents").
-11-
Indeed, the magistrate judge found no evidence indicating
that "the Total franchise agreements [were intended] to force any
franchisee to reject the proposal." Santiago-Sepúlveda I, 582 F.
Supp. 2d at 182. And when the magistrate judge said that certain
provisions were unenforceable and struck them, Total went along
with the court and has not cross appealed. So we see no basis for
suggesting that Total intended that its offer be rejected, and
plaintiffs point to nothing that would support such an inference.
Instead, plaintiffs argue that any term violating state
law in any respect comprises a violation of section
2802(b)(2)(E)(iii)(II). For this position they rely on a statement
in a House Report that if
a franchisor proposed a provision in a
franchise agreement at the time of renewal
which was expressly prohibited or
unenforceable under State law, such change
could not be considered to have been made in
"good faith" within the meaning of
102(b)(3)(A) [15 U.S.C. § 2802(b)(3)(A)].
H.R. Rep. No. 103-737, at 5 (1994), reprinted in 1994 U.S.C.C.A.N.
2779, 2782-83.
This looks impressive until one learns that this language
was addressed to (a) a proposed provision that was not adopted;5
(b) an example discussing renewals under section 2802(b)(3)(A), and
5
Compare H.R. Rep. No. 103-737, at 10 (1994), reprinted in
1994 U.S.C.C.A.N. at 2785, with 15 U.S.C. § 2806(a), and Petroleum
Marketing Practices Act Amendments of 1994, Pub. L. No. 103-371,
108 Stat. 3484, 3485-86 (1994).
-12-
not to the incoming franchisor's duty to make a "good faith" offer
of nondiscriminatory contracts to franchisees, H.R. Rep. No. 103-
737, at 5 (1994), reprinted in 1994 U.S.C.C.A.N. at 2782; and (c)
a specialized problem regarding preemption for which a different
solution was found, id. at 4-5, reprinted in 1994 U.S.C.C.A.N. at
2782; 140 Cong. Rec. 27,316 (1994) (statement of Rep. Sharp).
Plaintiffs' per se rule would put at risk a vast number
of market withdrawals. Franchising contracts commonly cover a wide
range of subjects, including clauses "pertaining to nearly every
detail of operation" of the franchised business. Hadfield,
Problematic Relations: Franchising and the Law of Incomplete
Contracts, 42 Stan. L. Rev. 927, 943 (1990). Total's franchise
agreement, comprising interrelated contracts spanning about one
hundred pages, included hundreds of clauses--of which the
magistrate judge invalidated in part just five.
Congress did make clear that, save where PMPA regulates
termination and renewal and so bars inconsistent state law, state
law is not superceded, 15 U.S.C. § 2806(a), and it provided that a
franchisor could not require as a condition of entering into or
renewing a franchise a "release or waive[r]" of a federal right or
"any right that the franchisee may have under any valid and
applicable State law," id. § 2805(f). But the primary effect of
these reservations is to leave franchisees free to bring private
-13-
suits in state court to invalidate franchise provisions that are
inconsistent with state law.
As the Supreme Court recently explained:
In enacting the PMPA, Congress did not
regulate every aspect of the petroleum
franchise relationship but instead federalized
only the two parts of that relationship with
which it was most concerned: the circumstances
in which franchisors may terminate a franchise
or decline to renew a franchise relationship.
Congress left undisturbed state-law regulation
of other types of disputes between petroleum
franchisors and franchisees.
Mac's Shell Serv., Inc. v. Shell Oil Prods. Co., 130 S. Ct. 1251,
1259 (2010) (citations omitted). Nothing in PMPA purports to
create a separate federal cause of action to remedy such
violations; the civil remedy provisions of section 2805 are
explicitly limited to violations of three other specified sections
including section 2802. 15 U.S.C. § 2805(a), (b), (d); Dersch
Energies, Inc. v. Shell Oil Co.,
314 F.3d 846, 857 (7th Cir. 2002).
This does not fully answer the question whether a state
law violation could ever serve to defeat a good faith offer under
section 2802(b)(2)(E)(iii)(II); but it suggests that the "good
faith" test is not failed merely because a couple of terms in a
complex contract are at odds with state contract or franchise law,
itself often no model of clarity.6 Violations so harmful to the
6
Mac's Shell pointed out that construing the PMPA to cover
"'run-of-the-mill' franchise disputes" would have "serious
implications" and, because PMPA requires attorney and expert
witness fees and permits punitive damages,"turn everyday contract
disputes into high-stakes affairs." 130 S. Ct. at 1260 n.7.
-14-
core franchise bargain as to invite rejection might be evidence of
an intent to cause rejection; but nothing like that is present
here.
Plaintiffs next argue that the entire franchise contract
is invalid under state law, and so Total never in fact made an
"offer[]" of "a franchise to the franchisee[s]" under section
2802(b)(2)(E)(iii)(II). The underlying argument is that the
contract could not be saved by deleting specific clauses because
those provisions were not severable from the contract and so the
entire contract is invalid. However, the contracts include a
"Severance of Clauses" provision that reads in pertinent part as
follows:
[S]hould any provision in this Contract be
found to be unlawful, invalid, or
unenforceable under present or future laws,
said provisions shall be nullified; this
Contract shall be interpreted and governed as
if said unlawful, invalid or unenforceable
provision had never been a part thereof, and
the rest of the provisions in this Contract
shall remain in force and will not be affected
by the unlawful, invalid or unenforceable
provision or its elimination.
The franchise agreements are largely governed by Puerto
Rico law and such severance is permissible under Puerto Rico law.
E.g., McCrillis v. Autoridad de las Navieras de P.R., 23 P.R.
Offic. Trans. 109, 132-33 (P.R. 1989) ("[T]he parties, by mutual
agreement, stipulated the partial conservation of the contract.
There is no protected social interest that bars this solution."
(footnote omitted)). Nor, as plaintiffs' mistakenly claim, is
-15-
severance equivalent to "reformation," 27 R. Lord, Williston on
Contracts § 70:19 (4th ed. 2003), so the conditions for reformation
are beside the point.
Plaintiffs also say that any terms inconsistent with
Puerto Rico law amount to a required waiver or release of state law
rights forbidden by section 2805(f)(1) and that, as they have not
been paid separately for such a waiver or release, the contract
fails for want of consideration. Congress was apparently willing
to allow such waivers or releases if compensated, H.R. Rep. No.
103-737, at 6 (1994), reprinted in 1994 U.S.C.C.A.N. at 2782; S.
Rep. No. 103-387, at 4 (1994), but the terms found invalid were
voided by the magistrate judge and so could hardly justify
compensation.
As the last of their substantive claims, plaintiffs say
that the magistrate judge should have invalidated, under 15 U.S.C.
§ 2805(f)(1), still other provisions of the contract as violations
of state law--for example, a non-compete clause relating to
convenience store operations. No request for their invalidation
was made until plaintiffs' reply brief and so they are barred on
this appeal, Rivera-Muriente v. Agosto-Alicea, 959 F.2d 349, 354
(1st Cir. 1992), but plaintiffs may pursue whatever remedies they
retain under state law.
Plaintiffs also make a single procedural claim, namely,
that the magistrate judge misstated the burden of proof at several
-16-
points in his decision. The statute, as already noted, says that
the plaintiff must show termination and the defendant must then
show that the conditions permitting termination were met. 15
U.S.C. § 2805(c). The magistrate judge's statements are arguably
inconsistent with one another, recognizing at one point that the
burden was on the defendant and at other points suggesting that
plaintiffs had failed to offer evidence on specific issues.
Confusion can easily occur because a defendant often
cannot know what the objection is until one is identified by the
plaintiff, and a lack of evidence from the party not bearing the
burden of proof can bear on whether there is an issue to be
resolved. In all events, the preserved arguments that we have
considered do not turn on who bears the burden of proof, and there
is no indication that the magistrate judge's statements affected
the outcome. See In re LaFata, 483 F.3d 13, 23 (1st Cir. 2007).
Finally, plaintiffs seek damages and attorney fees.
Under 15 U.S.C. § 2805(d)(1), these are allowed to plaintiffs who
prove a violation of sections 2802, 2803 or 2807, but, as we
explained above, plaintiffs failed to prove any such violation.
Although the magistrate judge sided with plaintiffs on their
section 2805(f) claims, PMPA--which provides no express remedies to
plaintiffs for such violations, id. § 2805(a), (d)--assuredly does
not provide damages or fees for state law violations standing
-17-
alone, so the magistrate judge correctly refused to award damages
or fees.
The judgment of the court below is affirmed. Each side
will bear its own costs on this appeal.
It is so ordered.
-18-
