USCA1 Opinion
October 26, 1995 [NOT FOR PUBLICATION]
UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT
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No. 95-1314
SHELL OIL COMPANY,
Plaintiff, Appellant,
v.
K.E.M. SERVICE, INC.,
Defendant, Appellee.
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APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF RHODE ISLAND
[Hon. Francis J. Boyle, Senior District Judge]
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Cyr, Boudin and Lynch,
Circuit Judges.
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George A. Nachtigall, with whom Mark A. Pogue, Marc A. Crisafulli
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and Edwards & Angell were on brief for appellant.
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Paul J. Pisano, with whom Paul J. Pisano Law Associates, Albert
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R. Romano and Romano, Spinella & Hayes were on brief for appellee.
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Per Curiam. Shell Oil Company ("Shell") sued, under
Per Curiam.
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the Petroleum Marketing Practices Act, 15 U.S.C. 2801 et seq.
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("PMPA"), to terminate its franchise agreement and lease with
K.E.M. Service, Inc. ("K.E.M.") due to alleged contract viola-
tions. K.E.M. counterclaimed, and Shell now appeals a prelimi-
nary injunction requiring it to continue selling gasoline to
K.E.M. pending final adjudication of Shell's PMPA-based claims.
See Shell Oil Co. v. K.E.M. Serv., Inc., No. 95-001B (D.R.I. Feb.
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16, 1995). As the record does not enable a determination that
the district court manifestly abused its discretion in finding
that "there exist sufficiently serious questions going to the
merits [of Shell's claims and K.E.M.'s defenses] to make such
questions a fair ground for litigation," 15 U.S.C. 2805(b)(A),
we affirm.
We state the material facts briefly. K.E.M. and its
president/owner, John Gorter, operate a Shell retail gasoline
station in East Greenwich, Rhode Island. Their current five-year
franchise and lease agreement (hereinafter: "Agreement") expires
in 1998. According to K.E.M., Shell decided in 1993 to install
another franchisee on the leased premises, and when Gorter
declined a buy-out offer, Shell initiated a bad-faith effort to
oust K.E.M. prematurely from its franchise/lease. To this end,
Shell audited and cited K.E.M. for violations of Rhode Island
environmental regulations, specifically for its failure to keep a
written record of daily gasoline inventory reconciliations on the
leased premises. Further, Shell abruptly altered its longstand-
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ing policy of delivering "short loads" i.e., less than full
tank-truck loads of gasoline to K.E.M. Since K.E.M. has
limited underground storage-tank capacity, it was forced to buy
and sell non-Shell gasoline in short loads, or else cease opera-
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tion.
Shell contends that its alleged bad faith is irrelevant
under the PMPA, given that K.E.M. admittedly engaged in the
"willful adulteration, mislabeling or misbranding of motor fuels
or other trademark violations." 15 U.S.C. 2802(c)(10); see
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Agreement Art. 18.1(c)(10) (same). Shell also argues that, in at
least two respects, K.E.M. "knowing[ly] fail[ed] . . . to comply
with . . . State . . . [environmental] laws or regulations
relevant to the operation of the marketing premises," 15 U.S.C.
2802(c)(11); Agreement Art. 18.1(c)(11) (same). First, although
K.E.M. kept gasoline inventory figures and performed a daily
inventory reconciliation, it failed to record the final amount of
any differential in its written records. See Rhode Island Dep't
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of Envtl. Management Regulation DEM-DWM-UST04-93, 13.00 et
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seq. (1993). Second, K.E.M.'s records were in the possession of
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its accountant, rather than at the service station. Shell cites
case law to the effect that a franchisor's unilateral termination
of a franchise is conclusively presumed "reasonable," as a matter
of law and regardless whether the motives for the termination are
unfairly coercive or sinister, if the franchisee has committed
any of the twelve acts enumerated in PMPA 2805(c). See, e.g.,
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Russo v. Texaco, 808 F.2d 221, 225 (2d Cir. 1986).
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K.E.M. counters that PMPA 2802(c) contemplates two
types of equitable exceptions to the presumption prescribed in
2805(c). First, any purported PMPA recordkeeping violation was
merely "technical," since K.E.M. substantially complied with
Rhode Island environmental regulations. Second, Shell pressured
K.E.M. into violating the PMPA ban on gasoline misbranding by
preying on its hand-to-mouth fiscal condition when it abruptly
changed its longstanding course of dealing regarding deliveries
of "short loads." K.E.M. contends that it faced an irresoluble
dilemma: either buy non-Shell gasoline for resale, or cease its
retail operation for more than seven days, thereby committing a
separate violation constituting an independent ground for fran-
chise termination. See 15 U.S.C. 2802(c)(9).
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An appellant challenging a preliminary injunction must
bear the "heavy burden" of showing that the district court
committed a mistake of law or a manifest abuse of discretion.
Gately v. Commonwealth of Mass., 2 F.3d 1221, 1225 (1st Cir.
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1993), cert. denied, 114 S. Ct. 1832 (1994); see 28 U.S.C.
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1292(a)(1). Due deference must be accorded the ruling below,
since the district court is "steeped in the nuances of a case and
mindful of the texture and scent of the evidence." K-Mart Corp.
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v. Oriental Plaza, Inc., 875 F.2d 907, 915 (1st Cir. 1989).
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Under the PMPA, preliminary injunctive relief is more
readily available to franchisees than was the case at common law.
See, e.g., Narragansett Indian Tribe v. Guilbert, 934 F.3d 4, 5
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(1st Cir. 1991) (describing four-part, common law standard); but
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cf. Nassau Boulevard Shell Serv. Station, Inc. v. Shell Oil Co.,
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875 F.2d 359, 364 (2d Cir. 1989) (noting that PMPA franchisor
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must meet traditional, four-part test for preliminary injunc-
tion). Because the PMPA is a remedial statute, see infra, a
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franchisee need not demonstrate a likelihood of success on the
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merits, but merely that the franchisor terminated the franchise
and that "there exist sufficiently serious questions going to the
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merits to make such questions a fair ground for litigation." 15
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U.S.C. 2805(b)(1)(A) (emphasis added). See, e.g., Doebereiner
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v. Sohio Oil Co., 880 F.2d 329, 332 (11th Cir. 1989), modified on
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other grounds, 893 F.2d 1275 (1990); Sun Ref. & Mktg. Co. v.
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Rago, 741 F.2d 670, 673 (3d Cir. 1984).1
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Based on a careful evaluation of the record below, we
cannot conclude that the district court either committed a
mistake of law or abused its discretion in ruling that K.E.M.'s
proposed defenses were "sufficiently serious" to constitute "fair
ground[s] for litigation." Contrary to Shell's contention, the
question whether the PMPA admits of "equitable" exceptions which
would excuse a franchisee's noncompliance with state environmen-
tal regulations or its gasoline misbranding are matters of first
impression in this circuit, upon which we express no opinion at
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1PMPA 2805(b)(2)(B) does require the court to balance the
relative hardships to the parties in granting or denying prelimi-
nary injunctive relief. Shell does not challenge this aspect of
the district court ruling. See Shell Oil Co., No. 95-001B, slip
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op. at 15 (D.R.I. Feb. 16, 1995).
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this juncture.2
Proper resolution of these important matters if
necessary requires a more thorough exposition of the course of
dealing between the parties during their nine-year franchise
relationship. For example, section 2805(c)(11) proscribes a
franchisee's "knowing failure" to comply with state law. Section
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2801(13), however, defines "failure" to exclude "any failure
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which is only technical or unimportant to the franchise relation-
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ship." 15 U.S.C. 2801(13)(A). Although Shell contends that
K.E.M.'s violation was not "technical," it adduced no evidence
that it had ever threatened to terminate or terminated other
franchisees for comparable regulatory noncompliance, nor that the
State of Rhode Island had ever cited or fined a service station
owner for these types of violations. See S. Rep. No. 95-731, 95th
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Cong., 2d Sess. 15, reprinted in 1978 U.S.C.C.A.N. 873, 874
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(noting that Congress designed the PMPA with the general purpose
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2Our decision in Desfosses v. Wallace Energy, Inc., 836 F.2d
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22 (1st Cir. 1987), deals with PMPA 2802(c)(4), and not with
2802(c)(10) or (11). Although we there referred in general terms
to the "conclusive presumption of reasonableness" theory set
forth in Russo, supra, Desfosses had not defended on the ground
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that the franchisor had based its termination or nonrenewal on a
purely "technical" violation of state law, nor that the fran-
chisor's own conduct had coerced Desfosses into violating the
PMPA. Indeed, 2802(c)(4) does not pertain to violative acts of
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the franchisee, but to acts entirely within the franchisor's
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control. 15 U.S.C. 2802(c)(4) (providing for termination or
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nonrenewal upon the "loss of the franchisor's right to grant
possession of the leased marketing premises through expiration of
an underlying lease, if . . . the franchisee was notified in
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writing, prior to the commencement of the term of the then
existing franchise . . . of the duration of the underlying lease
. . . ."). Desfosses simply claimed that Wallace had not provid-
ed him with the requisite notice. Desfosses, 836 F.2d at 26.
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to protect "franchisees from arbitrary and discriminatory termi-
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nations or non-renewals of their franchises") (emphasis added).
At this juncture, we conclude that K.E.M.'s alleged lapses are at
least arguably de minimis. Since K.E.M. does possess the raw
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gasoline inventory data in written form with which State
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auditors could test its daily inventory reconciliations, we can
discern no manifest abuse of discretion in the district court
ruling that the "technicality" of this asserted ground for
termination presented K.E.M. with a colorable defense, i.e., a
"fair ground for litigation." See Shell Oil Co., No. 95-001B,
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slip op. at 13 (D.R.I. Feb. 16, 1995).
Similarly, "Congress enacted PMPA to avert the detri-
mental effects on the nationwide gasoline distribution system
caused by the unequal bargaining power enjoyed by large oil
conglomerates over their service-station franchisees." Four
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Corners Serv. Station, Inc. v. Mobil Oil Corp., 51 F.3d 306, 310
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(1st Cir. 1995). See Desfosses v. Wallace Energy, Inc., 836 F.2d
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22, 25 (1st Cir. 1987) (noting that PMPA "'must be given a
liberal construction consistent with its overriding purpose to
protect franchisees'") (citing Brach v. Amoco Oil Co., 677 F.2d
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1213, 1221 (7th Cir. 1982)). It also left "'to the courts the
task of resorting to traditional principles of equity to maximize
attainment of the competing statutory objectives consistently
with . . . the purposes of the [PMPA].'" Shell Oil Co. v. K.E.M.
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Serv., Inc., No. 95-001B, slip op. at 11 (D.R.I. Feb. 16, 1995)
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(quoting S. Rep. No. 95-731). Accordingly, were discovery and
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trial to disclose that Shell knowingly took inequitable advantage
of K.E.M.'s precarious market position and inferior bargaining
position, the question whether Congress contemplated "equitable"
exceptions to section 2802(c)(10)'s "willful misbranding" prohi-
bition would be presented on a fully developed factual record.
Finally, equitable relief from section 2802(10) might
be considered more appropriate were K.E.M. to demonstrate at
trial that Shell had breached the Agreement first, leaving K.E.M.
with the Hobson's choice of buying non-Shell gasoline or going
out of business. The Agreement expressly provides that Shell has
no contractual obligation to deliver "short loads" to K.E.M. See
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Agreement Art. 9.1. On the other hand, Shell abruptly ceased
providing K.E.M with "short loads" after a nine-year course of
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dealing. Course of dealing may be competent evidence of a
subsequent modification of a written contract. See, e.g., R.I.
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Gen. Laws 6A-1-205, 6A-2-202. Although the Agreement contains
a provision barring nonwritten modifications, see Agreement Art.
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26, the PMPA specifically provides that franchise agreements may
be written or oral. See 15 U.S.C. 2801(10), 2801(1)(A), (B)
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(defining "franchise" as "contract"); see also Royer v. Royer,
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501 A.2d 739, 741 (R.I. 1985) ("[A] written contract may be
modified by subsequent oral agreement of the parties," even where
contract expressly requires written modification only.); J. Koury
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Steel Erectors, Inc. v. San-Vel Concrete Corp., 387 A.2d 694, 697
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(R.I. 1979) (describing implied-in-fact contracts arising from
course of dealing).
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What is more important, the PMPA's definition of
"contract" expressly provides that, "[f]or supply purposes,
delivery levels during the same month of the previous year shall
be prima facie evidence of an agreement to deliver such levels."
15 U.S.C. 2801(10). If the "short load" delivery levels became
part of a modified Shell-K.E.M. franchise contract, Shell's
abrupt change of course might constitute a breach of the fran-
chise agreement. Thus viewed, K.E.M.'s "equitable" defense to
section 2802(c)(10) might be considered at least "colorable,"
since K.E.M. might make a plausible argument that Congress could
not have intended to permit franchisors to resort to conclusive
presumptions of "reasonableness" under section 2802(c) where
their own breach of the franchise agreement afforded the means of
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securing a per se right of termination.
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Given the prominent equitable mandate in the PMPA's
legislative history, as well as the nebulous and undeveloped
factual record, we cannot conclude that the district court
manifestly abused its discretion in deciding that "serious
questions going to the merits [of Shell's claim and K.E.M.'s
defenses offer] . . . fair ground for litigation." Nor do we
presume to determine the relative merits, either of Shell's
claims or K.E.M.'s defenses.
The preliminary injunction is affirmed and the case is
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remanded to the district court for further proceedings.
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