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Lawletter No. 176 Buyers should be wary of accepting a trial franchise A New York federal court had upheld a refiner's refusal to renew a trial franchise in the recent case ofGutman v. Amoco Oil Co., (11/16/93) DC SNY, No. 93 Civ. 6377 (LLS), 65 BNA Antitrust & Trade Reg. Rptr. 769. The ruling illustrates some points of which any prospective buyer of a service station may want to consider prior to committing himself. Facts: Boris Gutman signed a trial franchise for an Amoco station in New York. At the end of the one-year period, Amoco sent Gutman a notice of nonrenewal. Amoco relied on its right to nonrenew a trial franchise without cause under the federal Petroleum Marketing Practices Act. Dealer's claims: Gutman filed suit under the PMPA and state law to stop the termination. The dealer claimed that he was entitled to receive the same legal protections as a "regular" franchisee because: (A) of his prior dealings with Amoco through his partner, Michael Poltorak, who had a franchise agreement and three year lease agreements with Amoco; and (B) he relied on Amoco's representations that the trial franchise agreement was just a matter of form and that he would in fact be treated as a regular franchisee. Ruling: The court ruled against the dealer, holding that: (1) The state franchise assignment law, New York General Business Law section 199-i, does not apply, because Gutman had not been a franchisee for a continuous three year period. (2) Gutman signed a contract invalidating any such oral representations. Recommended procedures: We suggest the following: (1) Handling sales: As this case illustrates, the sale of a service station franchise can raise some thorny legal issues. We strongly recommend you have good legal representation, regardless of whether you are the buyer or the seller. (2) California law: As we reported in Lawletter No. 147, the California courts have ruled that the dealer has a qualified right to assign his franchise to a buyer under our state's franchise assignment law, Business & Professions Code section 21148. This means that the oil company cannot force the buyer to take a trial franchise as a condition of allowing the franchise to change hands. However, refiners still try to use a variety of devices, such as large transfer fees, to persuade the buyer to "voluntarily" accept a trial franchise. (3) Accepting a trial franchise: If you are the buyer in such a transaction, make sure that you fully understand the consequences of accepting a one-year "trial" franchise instead of an assignment of the seller's existing franchise. In most cases, the franchisor has the right to refuse to renew your franchise at the end of the year without good cause. In the case of a "regular" franchise, the PMPA requires that the refiner have specific legal grounds for refusing to renew. Ask yourself whether the inducements offered by a franchisor are really worth the risks involved. You may want legal advice on this point. (4) Asserting right to an assignment: In order for a buyer or a seller to properly invoke the provisions of California law applicable to the assignment of a service station franchise, the parties must open an escrow and formally notify the company. Make sure that you comply with all relevant legal requirements. (5) Disregard oral promises to renew: Never base a decision to accept a trial franchise solely on an oil company's oral promise that it will renew the franchise. Most courts hold that such promises are not legally binding. (6) Transfer fees: The large transfer fees charged by some franchisors may not always be legal. For more information on transfer fees, see Lawletter No. 170. |
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