Lawletter No 165 

Appeals court reinstates rent challenge

A federal appeals court has held that an oil company may very well have imposed an unlawful rent increase on one of its dealers in the recent case of Duff v. Marathon Petroleum Co. (7th Cir. 1993) 64 BNA Antitrust & Trade Reg. Rptr. 150. The case illustrates several important points about rent lawsuits under the PMPA.

Facts: John Duff was a Marathon dealer in Palatine, Illinois. He filed a personal injury suit against his franchisor. Marathon raised the station rent, and Duff went out of business.

Duff sued the company under the Petroleum Marketing Practices Act. Marathon moved for summary judgment, claiming that it used a uniform formula for calculating station rents. The franchisor asserted that the true cause of the rent increase was a succession of property appraisals which greatly increased Duff's rent when the formula was applied to his station.

Duff pointed to a number of anomalies in the appraisals and to unexplained discrepancies between the appraisals of his station and the appraisals of similar Marathon stations in the immediate area. The dealer also claimed that the company refused to provide his with needed maintenance, repeatedly threatened him with termination and harassed him in a variety of of other ways.

In response, Marathon denied any intent to discriminate against Duff. The franchisor further presented evidence that the people in the company who do the real estate appraisals are in a separate department that has nothing to do with determining franchise terms or renewals.

The federal district court granted summary judgement for Marathon and Duff appealed.

Ruling: The appeals court reversed the district court and remanded the case for further proceedings. Specifically, the appeals panel held that Duff's case should not have been summarily dismissed, ruling that:

(1) The trial court judge apparently ignored the dealer's claims that Marathon intentionally altered the figures it plugged into its uniform formula. Marathon's other evidence did not definitively prove that there was no discrimination.

(2) The fact that duff's rent increased by over 400% during a five year period, combined with his other allegations, raise some serious questions of fact.

(3) The dealer should have the right to conduct some additional discovery to determine the company's true intent.

Recommended procedures: We suggest the following:

(1) Obtaining legal advice: This lawsuit furnishes a good illustration of why lawyers have such a difficult time predicting the outcome of any given case. Note that the trial judge seems to have completely ignored some of the dealer's evidence. Note also that different judges ruled differently on the same set of facts.

In complex business cases, no lawyer can predict the result for certain. Be wary of attorneys who do not advise you of this fact.

(2) Challenging rent increases: Dealers have not had much luck challenging station rents under the PMPA (E.g., see Lawletter No. 157). Courts tend to hold that the fact that an increase will put a dealer out of business will not, in itself, render the increase invalid. The relevant rulings state that the issue is whether or not a particular dealer's rent is discriminatory.Ó

Many oil companies have therefore developed some kind of uniform formula for determining rents. In most cases these formulas have been upheld.

In such a case, the dealer must challenge the validity or accuracy of the raw data which the franchisor plugged into the formula. This will usually involve some complex and potentially expensive discovery regarding the franchisers practices.

The dealer should also have some evidence of a reason why he was singled out for different treatment.

(3) don't refuse to sign; It is practically never a good idea to refuse to sign a new lease without legal advice. You are permitted under the PMPA to sign under protest, and to later file suit challenging the rent. That way, you do not go out of business if you lose. For details, see Lawletter No. 151.

(4) don't withhold rent: Never withhold service station rent without legal advice (See Lawletter No. 164).

Small stores exempted from waste tire facility permit requirement

The California Integrated Waste Management Act of 1989 regulates the handling and disposal of solid waste. The act, for purposes of provisions regulating waste tires, defines the term 'Minor waste tire facility' to mean a waste tire facility where, at any time, 500 or more, but less than 5,000 was tires are or will be stored, stockpiled, accumulated or discarded. The act requires California Integrated Waste Management Board to issue minor waste tire facility permits.

An amendment to section 42808 of the Public Resources Code, effective January 1, 1993, a 'Minor waste tire facility' does not include a tire dealer or automobile dismantler who stores tires on the premises for less than 90 days if not more than 1,500 waste tires are ever accumulated on the dealer or dismantler's premises.

Legislature mandates report on sales tax snitch program

California law authorizes the State Board of Equalization to establish a reward program for information resulting in the identification of underreported or unreported sales and use taxes. The reward may equal up to ten percent (10%) of the taxes collected as a result of the information provided. The Legislature has amended Revenue & Taxation Code section 7060 to require the Board to report to it within the next two and a half years on the number of informant letters and phone calls received, the additional taxes collected as a result, and the cost of the program.

Refiner loses below cost selling ruling

In what has been hailed as a landmark case, the Alabama Supreme Court has made it easier to sue a refiner under that state's below-cost sales law in the recent case of McGuire Oil Co. v. Mapco, Inc. 1992 Ala. LEXIS 1539, , December 18, 1992.

Facts: Three jobbers sued Mapco, an independent refiner of unbranded gasoline, under the Alabama Motor Fuel Marketing Act ('AMFMA'). The jobbers sell at both wholesale and retail. So does Mapco. The jobbers asserted that Mapco sold gasoline below cost at one location for 596 days, and another location for 821 days. The jobbers claimed damages in the amount of $250,000.

The case was brought in federal court. The U.S. Eleventh Circuit Court of Appeals asked the Alabama Supreme Court to rule on several key questions. The state court held that:

(1) Injury to even a single competitor is enough to justify a lawsuit under the AMFMA. The jobbers did not have to prove an injury to the competitive process itself.Ó This probably means that the jobbers could sue for lost profits without proving that Mapco had driven anyone out of business;

(2) It is irrelevant whether Mapco had a large share of the local market. It is the act of selling below cost for the purpose of attracting customers from the competition that violates the AMFMA;

(3) Mapco has a right under the AMFMA to meet competition, even if it must sell below cost to do so. However, Mapco could not lawfully sell gasoline for less than its competitors if it meant selling below cost. Even as a private brand marketer, Mapco could not sell below cost in order to undersell major brand competition.

Recommended procedures: California has one of the country's stronger below-cost sales laws. For a detailed report, see Lawletter No. 158.

Ruling against Pennzoil affirmed

The United States Court of Appeals for the Third Circuit has upheld a lower court's restraining Pennzoil from continuing its ad campaign based on its claim that its motor oil provides 'longer engine life and better engine protection' in the recent case of Castrol v. Pennzoil Co. (3d Cir. 2/4/93) 64 BNA Antitrust & Trade Reg. Rptr. 161.

Castrol filed suit against Pennzoil for unfair competition. The federal district court found that Pennzoil's claims about its motor oil are false. The trial judge issued an injunction barring Pennzoil's advertising campaign. Pennzoil appealed.

The Court of Appeals affirmed the trial judge's ruling. The high court noted that Castrol present copious affirmative evidence to prove that pennzoil's claim to superior protection from engine failure is false. Qualified experts testified that percent viscosity loss, as measured by ASTM D-3945, is irrelevant to engine protection.

The court further noted that the evidence showed that it is the level of viscosity that the engine experiences in operation, not the percentage loss, that is significant to engine performance. Also, the ASTM D-3945 measures viscosity loss in terms of low shear viscosity, while the industry consensus teaches that high temperature and high shear conditions most authentically emulate actual engine conditions.

The court rejected pennzoil's claim that the injunction violated its right to free speech under the First Amendment. For more details on this case, see Lawletter No. 160.

Unusual circumstance estimates

California law requires an automotive repair dealer to give the customer a written estimate before starting a repair job (See Lawletter No. 164 ). But Bureau of Automotive Repair regulations allow an exception to this rule in what it calls unusual circumstances.

Section 3353: Section 3353(d) of the California Administrative Code allows the dealer to start work without giving the customer a written estimate where all of the following requirements are met:

(1) The customer is unable to bring the car during business hours;

(2) The customer requests that the dealer take possession of the vehicle for the purpose of repair or estimating the cost of repair;

(3) Following all of the regular legal requirements, the dealer prepares a written estimate;

(4) Before starting the job, the dealer or his employee gives the customer all of the information on the written estimate and the customer approves the price; and

(5) The dealer or his employee writes on the invoice the name of the person authorizing the work, the date and time, and the telephone number called, if any.

Recommended procedures: Any time you rely on a customer's oral authorization there is a potential problem. In the event of a dispute, it's a case of your word against his. Therefore we recommend that you:

1. Be sure that you comply with each of the five requirements listed above;

2. Be especially careful where you do not know the customer;

and