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Lawletter 222 Chevron dealers face uncertain future Chevron has announced that its goal is to transform its retail operations so that: (1) 1/3 of its stations are company-ops. (2) 1/3 of its stations are operated by lessee-dealers; and (3) 1/3 of its stations are to be operated by "contract" dealers, i.e., the dealer either owns the property or leases it from a third party. Chevron also intends to close service bays and to convert stations to food marts or convenience stores which also sell motor fuel. At the very least, this means that Chevron will: (A) Build some new stations and company op. them; (B) Convert some existing stations to company operation; (C) Require some lessee-dealers to close service bays as a condition of renewal; (D) Offer to sell some station property to dealers; (E) Close some stations and sell them; and (F) Buy some dealers out. In trying to predict his future, the Chevron dealer will want to research and analyze how the company’s program might apply to his specific site. In some cases, Chevron will undoubtedly make exceptions in how it applies it yardstick. For example, there are undoubtedly some sites which the company will want to keep that cannot readily be converted to c-store or food mart operation, due to zoning or other problems. It is therefore very dangerous to generalize. In this issue, we are providing Chevron dealers with a guide to how some of the more important legal issues might affect particular sites. The applicable rules are complex. We are therefore breaking down the analysis into the following sections: (1) What Chevron cannot (and almost certainly will not) do to achieve its goals; (2) What Chevron can (and probably will) do to achieve its goals; (3) What Chevron in theory should not be able to do, but usually gets away with doing; (4) What the dealer can do to achieve his objectives of economic survival, maximization of profits and/or recovery of his investment; and (5) What the dealer cannot do to achieve these objectives. We hope that this guide will provide you with a helpful analytical tool in determining what your future might hold. We would also emphasize that the following is a guide to the relevant legal issues. You will also need to consider business, financial, technical and other factors in your long-range planning. In most cases, the governing law is the federal Petroleum Marketing Practices Act (the "PMPA," Title 15, United States Code, sections 2801-2806).
What Chevron cannot do There are certain things that Chevron cannot lawfully do to in order to achieve its goals. The company may not: 1. Terminate or nonrenew a dealer’s franchise for the purpose of converting to company operation. PMPA 2. Close a fee owned station without making a bona fide offer to sell its entire interest in the premises to the dealer, or in the alternative, grant the dealer a right of first refusal on any purchase offer made by a third party. The PMPA provides that the offer: (a) Cannot exceed the fair market value of the property; (b) Cannot exclude tanks (unless they pose an environmental hazard or cannot lawfully be operated), lines, or the building; (c) Cannot ignore cleanup issue where third party (e.g., SBA) finances the deal; (d) Cannot force the dealer who buys to brand Chevron; and (e) Cannot force purchasing dealer to close bays as condition of the sale. 3. Close a base lease station without advance disclosure and offer to sell the improvements to the dealer if the dealer: (a) Purchases or leases the property from the landowner; and (b) Makes a written demand for an offer to sell the improvements within 30 days of the service of the notice of termination or nonrenewal. 4. Condition renewal on the lessee-dealer’s agreement to make an unreasonably high investment in upgrading or improving the premises. 5. Require the dealer’s consent to a non-PMPA franchise (e.g., fast food) as a condition of renewal of the PMPA (i.e., motor fuels) franchise. 6. Transfer station property occupied by a lessee-dealer to a jobber without offering it to the dealer. California Business and Professions Code section 20999.25. What Chevron can do There are certain things which Chevron can legally do in order to achieve its goals. The company may: 1. Open new company stations. 2. Where the dealer signs mutual termination agreement, dies without designating a successor-in-interest or is terminated for cause, Chevron can: (a) Convert the station to company operation. (b) Sell the land to anybody it want to, and require the buyer to sign a supply contract as a condition of the sale. (c) Close the location without offering to sell it to the outgoing dealer. 3. Where dealer tries to sell his business, Chevron can exercise its right- of-first-refusal under exercise first refusal right. Once it acquires control of the station, it can do any of the three things listed immediately above under 2(a), (b) and (c). 4. Where Chevron owns the property ("fee") it can: (a) Close the station, as long as it either makes a bona fide offer to sell the property to the dealer, or grants him or her a right-of-first-refusal on any offer made by a third party; (b) Refuse to continue supply the station even if the dealer accepts the offer and purchases the property; (c) Convert the station to company operation a year later if the dealer doesn’t buy the property or file suit. Chevron can do this because the statute of limitations on an action for damages under the PMPA is one year. Once that time period has passed, it is too late for the dealer to file a suit claiming that the company did not really intend to sell or close the location, but wanted to company-op it all along. 5. Require closure of service bays as a condition of renewal of a lessee dealer’s franchise. Svela v. Union Oil Co. (9th Cir. 1987) 807 F.2d 1494 6. Once dealer signs an agreement to enter into non-PMPA franchise or make unreasonably large investment in improving the station, hold him to it. 7. Condition offer to establish new franchise relationship or franchise renewal with a "contract" dealer (i.e., dealer who owns the land or leases it from a third party) upon: (a) Closure of service bays (b) Making specified improvements, including c-store or grocery store (c) Acceptance of loan which is then paid off over the balance of the contract (d) Agreement that Chevron has the right to pull any competitive allowance at any time, and that such action will not affect the dealer’s other obligations to Chevron (such as paying off the loan in full). (e) Agreement to severe penalty or "liquidated damages" which take effect if the dealer breach the agreement. (f) Agreement to "loan" the dealer money to buy the property from Chevron without making any provisions for cleanup. (g) Acceleration of the loan principal upon sale of property or business. (h) Dealer’s granting Chevron a first refusal right on future sale or lease of property What Chevron (theoretically) cannot do Chevron is fairly likely to follow the law on the points listed above. However, there are certain practices which may be unlawful in theory but are regularly engaged in by oil companies without serious legal consequences. The reason for this is probably that to challenge these practices, a dealer would have to be willing to sue a franchisor with whom he or she has an ongoing relationship. They include: 1. Discriminatory pricing to contract dealers and through zone pricing. 2. Secret rebates. 3. Unreasonably low retail prices at company stations. 4. Telling a dealer that he "must" sign a co-branding, investment or other document. 5. Require a waiver of federal or state legal rights as a condition of renewal. Dealer’s goals We assume that the dealer’s goals are to: (1) Stay in business where possible and economically desirable; (2) Maximize his profits; and/or (3) Recover as much of his investment in the business and/or the land as possible. What the dealer can do To achieve these goals, the dealer can: 1. Prevent franchise termination or nonrenewal for express purpose of co-op. 2. Refuse to vacate station unless Chevron has good cause under PMPA. 3. Force Chevron to make bona fide offer when closing fee owned sites 4. Determine environmental history and status of station - get environmental file from agency which issues tank permit pursuant to Chapter 6.75 of the Health & Safety Code 5. Force Chevron to offer to sell the improvements it owns to him where the dealer buys or leases the site from a third party upon master lease expiration. 6. If he can buy the property or lease it from the landlord: (a) Pick any supplier he or she wants. (b) Refuse to choose supplier who requires bay closure 7. Sell the business in compliance with B&P Code section 21148. 8. Designate successor-in-interest under B&P Code section 21140.6. 9. Refuse to sign a mutual termination agreement. 10. Refuse to sign agreements without legal advice. 11. Use consultants and accountants. 12. Determine what zoning, liquor license restrictions apply 13. Timely assert his first refusal right on sale of fee-owned station Forty Niner Truck Plaza v. Unocal (1997); B&P 20999.25. What the dealer cannot do The dealer may not: 1. Make Chevron pay for goodwill unless it violates the PMPA. 2. Compel Chevron continue to supply him indefinitely if he buys or otherwise obtains control of the real estate. 3. Assert any PMPA rights against Chevron after signing a mutual termination agreement. 4. Prevent Chevron from closing the location as long as it complies with applicable rules, depending on the real estate. 5. Compel Chevron to treat his more favorably because of long-term tenure. 6. Breach a long-term supply contract with a liquidated damages provision without potentially severe financial consequences. |
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