Lawletter No. 155

Chevron wins customer pricing complaints case

A federal court has allowed Chevron to terminate a dealer's franchise based on customer complaints about alleged price gouging and the condition of the station in the recent case of Kelsoe v. Chevron U.S.A., Inc. (N.D. Cal. 11-19-91) CCH Bus. Fran. Guide Para. 9936. The ruling provides yet another example of the dangers of ignoring customer complaints.

Facts: Murray Kelsoe was a Chevron dealer in Sunol, California. Chevron received over 60 customer complaints regarding the condition of the premises and the dealer's gas prices. The average margin of the eight Chevron dealers located closest to Kelsoe's station ranged from 4.7 to 14.5 cents per gallon. Kelsoe's margin ranged from 30 to 75 cents per gallon.

Chevron served a nonrenewal notice on the dealer, and he filed suit under the federal Petroleum Marketing Practices Act. He sought a preliminary injunction against nonrenewal of the franchise.

Ruling: The federal district court denied Kelsoe motion for an injunction against Chevron, holding that:

(1) The PMPA permits nonrenewal of a franchise based on the franchiser's receipts of numerous bona fide customer complaints concerning the franchisees operation of the marketing premises.

(2) 60 complaints satisfies the numerous requirement.

(3) The pricing complaints are bona fide. The dealer was guilty of price gouging. This could damage Chevron's tradename.

(4) The dealer offered evidence that the basis for each of the complaints about the conditions of the station was minimal. However, the very number of complaints tends to show that there was a problem.

Analysis and recommended procedures: In Lawletter No. 153, we reported on another recent customer complaints case and set forth some detailed recommendations for dealing with this problem. If you are concerned about the issue, we suggest you review that coverage. To what we said there, we would add the following:

(1) Complaints about price: As a general rule, the dealer does have the right to set his own price. However, in a few cases, courts have upheld franchise termination on nonrenewal based on a significant number of customer complaints about a dealer's prices. In each of these cases, the dealer's margins were much higher than the average.

If your franchisor receives repeated complaints about your pricing, you should probably review the situation with your attorney.

(2) Station condition: It is important to note that the court in the Kelsoe v. Chevron case was not interested in whether any particular customer complaint about the condition of the station was justified in and of itself. Instead, the court drew that conclusion that there had to be a problem just because of the sheer number of complaints.