1998 Decisions

Opinions of the United

States Court of Appeals

for the Third Circuit

4-10-1998

Patel v. Sun Co Inc

Precedential or Non-Precedential:

Docket 96-2123

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Recommended Citation

"Patel v. Sun Co Inc" (1998). 1998 Decisions. Paper 75.

http://digitalcommons.law.villanova.edu/thirdcircuit_1998/75
Filed April 10, 1998 

UNITED STATES COURT OF APPEALS 

FOR THE THIRD CIRCUIT 

NO. 96-2123 

PRAKASH H. PATEL; SHOBHA P. PATEL, H/W 

APPELLANTS 

v. 

SUN COMPANY, INC.; LANCASTER ASSOCIATES 

On Appeal From the United States District Court 

For the Eastern District of Pennsylvania 

(D.C. Civ. No. 94-cv-04318) 

Argued: September 15, 1997 

Before: BECKER, Chief Judge, SLOVITER and SCIRICA, 

Circuit Judges. 

(Filed April 10, 1998) 

 DIMITRI G. DASKAL, ESQUIRE 

 (ARGUED) 

 The Daskal Law Group 

 3 Church Circle 

 Suite 500 

 Annapolis, MD 21401 

 Attorney for Appellants 
 JAMES M. BROGAN, ESQUIRE 

 (ARGUED) 

 CHRISTOPHER W. WASSON, 

 ESQUIRE 

 Piper & Marbury 

 18th & Arch Streets 

 3400 Two Logan Square 

 Philadelphia, PA 19103 

 VIRGINIA L. ROCKAFELLOW, 

 ESQUIRE 

 RICHARD GAINES, 

 ESQUIRE 

 Sun Company, Inc. (R&M) 

 Ten Penn Center 

 1801 Market Street, 17th Floor 

 Philadelphia, PA 19103 

 Attorneys for Appellee 

OPINION OF THE COURT 

BECKER,* Chief Circuit Judge. 

Plaintiffs Prakash H. Patel and Shobha P. Patel appeal 

from an order of the district court granting summary 

judgment in favor of defendant Sun Company, Inc. ("Sun") 

in a case brought under the Petroleum Marketing Practices 

Act, 15 U.S.C. S 2801 et seq. ("PMPA" or "Act"). This 

litigation has been ongoing since 1988, and the case has 

been here before, see Patel v. Sun Co., Inc., 63 F.3d 248, 

252 (3d Cir. 1995) ("Patel V"). The gravamen of the Patels' 

complaint, then and now, is that Sun has made an "end 

run" around a provision of the PMPA that requires service 

station franchisors like Sun to make bona fide offers to 

their franchisees before selling the service station premises 

to a third party. See S 2802(b)(3)(D)(iii)(I). 

_________________________________________________________________ 

* Edward R. Becker, United States Circuit Judge for the Third Circuit, 

assumed Chief Judge status on February 1, 1998. 

 2 
In 1987, Sun sold the land upon which the Patels had 

operated their service station for twenty-two years to an 

unrelated third party, Lancaster Associates ("Lancaster"), 

without first offering it to them. Sun claims that it was not 

required to make a bona fide offer to the Patels because it 

did not terminate their franchise when it sold the property. 

Instead, Sun took a six year leaseback from Lancaster and 

did not disturb the Patels' franchise until that lease expired 

in 1994. Sun contends that six years later it could rely on 

the "expiration of an underlying lease" provision of the 

PMPA, see S 2802(c)(4), which allows franchisors to

terminate or nonrenew franchises without first making a 

bona fide offer to their franchisees when the leases 

underlying the franchise expire. 

The Patels offer four alternative theories under which 

they claim that Sun should be liable for damages for selling 

the premises to Lancaster without first making a bona fide 

offer, despite the leaseback arrangement. First, they argue 

that because the Lancaster-Sun lease was created after the 

inception of the first franchise agreement between Sun and 

the Patels, it does not qualify as an "underlying lease" for 

the purposes of S 2802(c)(4). Therefore, according to the 

Patels, Sun cannot rely on S 2802(c)(4) to skirt the bona fide 

offer requirement in S 2802(b)(3)(D)(iii)(I). Second, they 

contend that, even if the Lancaster-Sun lease technically 

fits the S 2802(c)(4) definition of an underlying lease, Sun 

should not be permitted to circumvent the bona fide offer 

requirements simply by delaying the eventual nonrenewal 

date through the use of a leaseback. To the extent that the 

text of the PMPA seems to allow that result, the Patels urge 

us to close that "unintended loophole" by reading a "saleleaseback offer requirement" into the Act. Third, the Patels 

submit that we must inquire into the objective 

reasonableness of Sun's business decision to avoid the 

bona fide offer provision by creating the leaseback with 

Lancaster. Fourth, the Patels assert that, at the very least, 

Sun's decision to create the leaseback must have been 

made subjectively "in good faith and in the normal course 

of business" and not simply to avoid the bona fide offer 

requirement. 

Unfortunately for the Patels, none of their arguments 

carry the day. Under a plain reading of the unambiguous 

 3 
text of the Act, we find that the definition of "underlying 

lease" in S 2802(c)(4) is clear, and that it includes leases, 

like the Lancaster-Sun leaseback, created during the 

business relationship between the franchisor and 

franchisee. Additionally, we can find no statutory basis to 

justify reading into the PMPA new provisions like a "sale 

leaseback offer requirement" that have no grounding in the 

Act's text or legislative history. Moreover, our decision in 

Lugar v. Texaco, Inc., 755 F.2d 53 (3d Cir. 1985), precludes 

the imposition of an objective reasonableness inquiry into 

franchisor decisions to terminate or nonrenew franchises 

based on the underlying lease exception in S 2802(c)(4). 

Finally, while we agree with the Patels that under Slatky v. 

Amoco Oil Co., 830 F.2d 476 (3d Cir. 1987) (en banc), 

courts must engage in a subjective "in good faith and in the 

normal course of business" review of franchisor decisions to 

terminate or nonrenew the franchise when an underlying 

lease expires, we cannot reverse on this ground. This is 

because we are bound under the doctrine of law of the case 

by the judgment in Patel V, which found that Sun acted in 

good faith when it did not renew the Patels' franchise. For 

all these reasons, the judgment of the district court will be 

affirmed. 

I. 

Sun owned a parcel of land in Wayne, Pennsylvania, that 

contained a commercial office building, a large parking 

area, and other improvements. Sun leased a small portion 

of this property to the Patels, who operated a Sunoco 

service station there for twenty two years pursuant to a 

series of franchise agreements with Sun. The first postPMPA agreement between Sun and the Patels began on 

August 21, 1978. 

In December of 1987, Sun sold the entire undivided 

parcel, which included the Patels' service station on one 

corner, to Lancaster Associates, an unrelated third party 

developer. It is not clear from the record whether Sun first 

offered the property to the Patels, and so for the purposes 

of summary judgment review we must assume that Sun did 

not. Lancaster agreed to lease the service station portion of 

the parcel back to Sun until September 30, 1994. The 

 4 
Lancaster-Sun leaseback did not, however, contain any 

specific renewal provisions or options granting Sun the 

right to re-purchase the property. 

Sun, upon entering into the leaseback with Lancaster, 

and as part of their 1988 Franchise Agreement, 

immediately subleased the service station premises to the 

Patels for a term of three years. The sublease provided that 

Sun's right to grant possession of the premises was now 

subject to the Lancaster-Sun "underlying" lease that would 

expire on September 30, 1994. The sublease also informed 

the Patels that the sublease might not be renewed at the 

end of the lease period. While at no time during the 

Lancaster sale and leaseback did Sun interrupt the Patels' 

possession of the service station premises, according to the 

testimony of Lancaster general partner Bruce Robinson, 

Lancaster always expected that upon the expiration of the 

leaseback, the Patels' franchise would not be renewed 

because Sun had promised to remove the underground fuel 

tanks and clean up any environmental problems that 

existed on the property. 

In 1991, upon the expiration of the first three-year 

sublease, Sun and the Patels entered into a second threeyear sublease due to expire on August 21, 1994. This 

sublease, like the first, provided that Sun's right to grant 

possession of the premises was subject to the underlying 

Lancaster-Sun lease which would expire on September 30, 

1994, and it also informed the Patels that the sublease 

might not be renewed at the end of the lease period. On 

April 28, 1994, Sun sent written notification to the Patels 

that their lease and franchise would not be renewed at the 

end of the term due to the upcoming expiration of Sun's 

underlying lease with Lancaster on September 30, 1994. 

Beginning in 1988, the Patels filed a series of lawsuits 

claiming that Sun had effected a constructive termination 

or nonrenewal of their franchise in violation of the PMPA by 

not first offering them the right of first refusal on the 

"leased marketing premises" under the PMPA. See 

SS 2801(9) and 2802(b)(3)(D). The district court rejected the 

Patels' contentions in a series of decisions that ultimately 

concluded that their legal action was premature. The court 

reasoned that even if it were true that Sun had failed to 

 5 
offer the Patels the premises, the other necessary predicate 

act (termination or nonrenewal of the lease) had not yet 

occurred, and indeed, might never occur. See Patel v. Sun 

Ref. & Mktg. Co., No. 88-3958, slip op. at 1-2 (E.D. Pa. Oct. 

14, 1988) ("Patel I"); Patel v. Sun Ref. & Mktg. Co., 710 F. 

Supp. 1023 (E.D. Pa. 1989) ("Patel II"); Patel v. Sun Ref. & 

Mktg. Co., No. 88-3958, 1992 WL 25737, at *2 (E.D. Pa. 

Feb. 7, 1992) ("Patel III"). The Patels did not appeal these 

decisions. 

After receiving the notification of nonrenewal from Sun in 

1994, the Patels filed another action, again contending that 

the nonrenewal violated the PMPA because Sun had sold 

the property in 1987 without first giving them an offer to 

purchase it or a right of first refusal. The Patels sought 

injunctive relief to prevent the nonrenewal as well as 

monetary damages for Sun's alleged violation of the PMPA. 

The district court denied the request for injunctive relief 

because it found that the Patels had not satisfied the 

S 2805(b)(2) preliminary injunction standard, which

requires the franchisee to show "sufficiently serious 

questions going to the merits to make such questions a fair 

ground for litigation." Patel v. Sun Co., Inc., 866 F. Supp. 

871, 873-74 (E.D. Pa. 1994) ("Patel IV"). 

In a divided opinion, we affirmed the district court's 

denial of the injunction, although on different grounds, not 

reaching the merits determination made by the district 

court. See Patel V, 63 F.3d at 252. We held that the 

injunction was barred under S 2805(e)(1), which provides 

that a court may not compel renewal of a franchise 

relationship if the basis for the nonrenewal of the

relationship was a decision made in good faith and in the 

normal course of business by the franchisor to sell its 

interests in the leased marketing premises. See 

S 2805(e)(1)(A)(iii). We remanded to the district court, 

however, explaining, "[t]he Patels still have. . . the 

opportunity to present to the district court their contention 

that the nonrenewal of their franchise violatesS 2802 

because the reason given for the nonrenewal, the expiration 

of the underlying lease, was a condition created by the 

franchisor when it sold the property without offering the 

franchisee an opportunity to purchase it." Patel V, 63 F.3d 

at 253. 

 6 
On remand, both parties moved for summary judgment,

and the district court granted summary judgment in favor 

of Sun. See Patel v. Sun Co., Inc., 948 F. Supp. 465 (E.D. 

Pa. 1996) ("Patel VI"). The Patel VI court held that Sun 

could refuse to renew the Patels' franchise without liability, 

based upon the underlying lease exception in 

SS 2802(b)(2)(C) and 2802(c)(4). The district court relied 

upon our reasoning in Lugar, 755 F.2d at 53, and held that 

the underlying lease exception was not subject to any 

judicial inquiry into the circumstances surrounding Sun's 

decision to sell and leaseback the premises. See Patel VI, 

948 F. Supp. at 473 n.3. 

The Patels appealed again, and the long-running saga of 

"the Patels versus Sun" returns to this court anew. Section 

2805(a) of the PMPA confers jurisdiction on the federal 

courts and creates a civil cause of action against 

franchisors for violations of the substantive sections of the 

Act. Section 2805(d) provides for the award of actual and 

exemplary damages, as well as reasonable attorney and 

expert witness fees to a franchisee who prevails against a 

franchisor in a civil action under the Act. Because our 

standard of review is plenary, see Kelly v. Drexel Univ., 94 

F.3d 102, 104 (3d Cir. 1996), we apply the same test the 

district court should have applied in the first instance. See 

Olson v. General Elec. Astrospace, 101 F.3d 947, 951 (3d 

Cir. 1996); Helen L. v. DiDario, 46 F.3d 325, 329 (3d Cir. 

1995). We must determine, therefore, whether the record, 

when viewed in the light most favorable to the Patels, 

shows that there is no genuine issue of material fact and 

that Sun was entitled to summary judgment as a matter of 

law. See, e.g., Olson, 101 F.3d at 951; Celotex Corp. v. 

Catrett, 477 U.S. 317, 322-23 (1986); Anderson v. Liberty 

Lobby, Inc., 477 U.S. 242, 249-50 (1986). 

II. 

A. 

The PMPA regulates the relationship between franchisors, 

motor fuel refiners and distributors, and their franchisees, 

principally retail gas station operators. Many of these 

 7 
franchisees (like the Patels) lease their station premises 

from franchisors who (like Sun), own the premises. In 1978, 

after examining this relationship and determining that 

legislative protection for franchisees was necessary, 

Congress enacted the PMPA. Congress passed this 

legislation in large part because it was concerned that 

franchisors had been using their superior bargaining power 

to compel compliance with certain marketing policies and 

to gain an unfair advantage in contract disputes. See 

Slatky, 830 F.2d at 478 (citing S. Rep. No. 731, 95th Cong., 

2d Sess. 17-19, reprinted in 1978 U.S.C.C.A.N. 873, 875- 

77) ("Senate Report"); Patel V, 63 F.3d at 250. In addition, 

Congress wanted to protect franchisees from "arbitrary or 

discriminatory terminations and non-renewals." Senate 

Report at 18, 1978 U.S.C.C.A.N. 877. As we noted in

Slatky, when it passed the PMPA: 

 Congress determined that franchisees had a 

 "reasonable expectation[]" that "the [franchise] 

 relationship will be a continuing one." The PMPA's goal 

 is to protect a franchisee's "reasonable expectation" of 

 continuing the franchise relationship while at the same 

 time insuring that distributors have "adequate 

 flexibility . . . to respond to changing market conditions 

 and consumer preferences." 

830 F.2d at 478 (citing the Senate Report at 18-19). 

The PMPA prohibits franchisors from terminating or 

nonrenewing franchises except under certain prescribed 

situations. See S 2802(a). It also enumerates a series of 

grounds that permit a franchisor to terminate or nonrenew 

one of its franchisees without PMPA liability. See S 2802(b). 

These bases can be roughly separated into two categories: 

franchisee misconduct1 and legitimate franchisor business 

_________________________________________________________________ 

1. For example, the Act permits the franchisor to terminate or nonrenew 

a franchise if the franchisee fails to pay sums due under the franchise 

agreement, see S 2802(b)(2)(C) (incorporating S 2802(c)(8)); if the 

franchisee engages in fraud or criminal misconduct relevant to the 

operation of the property, see S 2802(b)(2)(C) (incorporating S 

2802(c)(1)); 

if the franchisor receives "numerous bona fide customer complaints" 

about the franchisee's operation of the property, see S 2802(b)(3)(B); or 

if 

the franchisee fails to operate the property in a "clean, safe, and 

healthful manner," see S 2802(b)(3)(C). 

 8 
decisions. In this case, only the latter, which are designed 

to ensure that franchisors maintain their ability to adjust to 

changing market conditions, are implicated. 

Among the acceptable business reasons for franchisee 

termination or nonrenewal (assuming that certain 

conditions in the Act are met) are the franchisor's decision 

to leave the geographic market area, see S 2802(b)(2)(E); 

failure of the franchisor and franchisee to agree in good 

faith and in the normal course of business to changes or 

additions to the franchise agreement, see S 2802(b)(3)(A); 

conversion of the property to a use other than sale of motor 

fuel, see S 2802(b)(3)(D)(i)(I); material alteration of the 

property, see S 2802(b)(3)(D)(i)(II); sale of the premises, see 

S 2802(b)(3)(D)(i)(III); unprofitability of the franchise, see 

S 2802(b)(3)(D)(i)(IV); loss of an underlying lease, see 

S 2802(b)(2)(C) (incorporating S 2802(c)(4)); and loss of 

franchisor's right to grant the trademark which is the 

subject of the franchise, see S 2802(b)(2)(C) (incorporating 

S 2802(c)(6)). Of these possible "business reason" 

exceptions, only two -- the sale of the premises and the 

loss of an underlying lease -- are the subject of this appeal. 

We therefore set out their requirements in greater detail. 

First, under S 2802(b)(3)(D)(i)(III), a franchisor may 

terminate or nonrenew a franchisee if the franchisor 

determines "in good faith and in the normal course of 

business" to sell the property. To qualify for this exception 

to the general prohibition against terminations or 

nonrenewals, however, the franchisor's purpose cannot be 

to convert the property to direct management by its own 

employees or agents. See S 2802(b)(3)(D)(ii). Moreover, the 

franchisor must have made either a bona fide offer to sell 

the property to the franchisee, or, if applicable, have 

provided the franchisee a right of first refusal on an offer 

made to a third party. See S 2802(b)(3)(D)(iii). 

Second, a franchisor may terminate or decline to renew 

a franchise agreement upon the "occurrence of an event 

which is relevant to the franchise relationship and as a 

result of which . . . nonrenewal of the franchise is 

reasonable." S 2802(b)(2)(C). Section 2802(c) expands on the 

general statement in S 2802(b)(2)(C) by enumerating a nonexclusive list of events that qualify as "relevant". Included 

 9 
in this list is "loss of the franchisor's right to grant 

possession of the leased marketing premises through

expiration of an underlying lease." S 2802(c)(4). In 1994, 

Congress amended this exception by requiring a franchisor 

to offer to assign to the franchisee "any option to extend the 

underlying lease or option to purchase the marketing 

premises that is held by the franchisor" when certain 

conditions are satisfied. See Petroleum Marketing Practices 

Act Amendments of 1994, Pub. L. No. 103-371, sec. 3, 

S 102(c)(4), 108 Stat. 3484, 3484 (codified at 15 U.S.C. 

S 2802(c)(4)(B)). As there were no options in the LancasterSun lease, that provision is not relevant to our decision 

here. We will, however, discuss the import of this 

amendment on our PMPA jurisprudence infra. 

B. 

The Patels' overarching argument is that if Sun is allowed 

to prevail here, it will have made a successful "end run" 

around the bona fide offer requirement contained in the 

sale exception to the PMPA's general rule prohibiting 

franchise nonrenewal. To evaluate this argument, it is 

necessary to understand the interplay between 

SS 2802(b)(3)(D) and 2802(c)(4) (as incorporated by

S 2802(b)(2)(C)). As we have explained, S 2802(b)(3)(D) 

requires that a franchisor make "a bona fide offer to sell, 

transfer, or assign to the franchisee [his] interests" in the 

leased marketing premises when the franchisor decides not 

to renew the franchise relationship before it sells the 

property to a third party. Thus, the Act contemplates a twoevent trigger to activate the bona fide offer requirement -- 

a sale of the property and a termination or nonrenewal of 

the franchise. 

In the ordinary case, the sale and the nonrenewal occur 

together, and there is no question that the franchisor must 

make a bona fide offer or grant a right of first refusal to the 

franchisee before selling to avoid liability under the Act. But 

the circumstances here are not "ordinary". In 1987, Sun's 

sale of the premises did not lead immediately to its failure 

to renew the Patels' franchise. Rather, Sun took a leaseback 

from Lancaster and renewed the Patels' franchise for not 

just one, but for two additional three year terms. Thus, 

 10 
when Sun sold the property to Lancaster, there was no 

nonrenewal, and the courts in Patel I-III, supra held that 

the right of first refusal and bona fide offer requirements of 

S 2802(b)(3)(D)(iii) had not yet been triggered. The Patels 

were told, in effect, to wait and see if their franchise would 

be terminated in the future. See Patel III, 1992 WL 25737 

at *2 ("At this point in time, they have not been subjected 

to a termination or non-renewal of their franchise. If such 

an event occurs, plaintiffs will have the protection of the 

PMPA at their disposal."). The Patels did not appeal these 

decisions. 

Barring another exception in the PMPA, Sun could not 

have avoided liability under the PMPA when it ultimately 

decided to nonrenew the Patels just because that 

nonrenewal was delayed through the use of a leaseback (or 

any other device). This is so, because the default regime of 

the Act is that all terminations or nonrenewals are unlawful 

unless otherwise excepted. See S 2802(a). In this case, 

however, when Sun actually failed to renew the Patels' 

franchise in 1994, it contended that a different provision -- 

S 2802(c)(4) -- shielded it from PMPA liability, because the 

expiration of the Lancaster-Sun lease now qualified as a 

relevant event under S 2802(b)(2)(C). Therefore, in Sun's 

view, the sale exception (with its bona fide offer 

requirement) no longer was relevant, for it could now rely 

on the underlying lease exception (which had no bona fide 

offer requirement). These are the mechanics of the "end 

run" of which the Patels complain. 

The Patels maintain that the district court should not 

have interpreted the PMPA to permit a franchisor to evade 

the bona fide offer requirement so easily, and they advance 

several theories why Sun should be liable for damages (they 

no longer seek injunctive relief). 

1. 

First, the Patels submit that the language of S 2802(c)(4) 

itself prohibits franchisors from creating and using 

leasebacks to avoid PMPA liability. They contend that a 

lease cannot be an "underlying lease" for the purposes of 

S 2802(c)(4) unless it predates the business relationship 

 11 
between the franchisor and franchisee (in other words, the 

lease must predate the creation of the initial franchise 

between the parties).2 The Patels argue that a lease that 

merely predates the existing franchise, like the LancasterSun leaseback in this case, should not be treated as an 

"underlying lease" because that would permit the 

subversion of the bona fide offer provision contained in the 

sale exception. 

We turn initially to the language of S 2802(c)(4) to 

determine what Congress intended by the term "underlying 

lease". The provision reads: 

 As used in subsection (b)(2)(C) of this section, the term 

 "an event which is relevant to the franchise

 relationship and as a result of which termination of the 

 franchise or nonrenewal of the franchise relationship is 

 reasonable" includes events such as -- 

 * * * 

 (4) 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 

 writing, prior to the commencement of the term of the 

 then existing franchise -- (A) of the duration of the 

 underlying lease, and (B) of the fact that such 

 underlying lease might expire and not be renewed 

 during the term of such franchise (in the case of 

_________________________________________________________________ 

2. In the text, we use the words "business relationship" instead of the 

perhaps more common-sensical term "franchise relationship" because we 

wish to avoid any confusion with that term as it is defined in S 2801(2). 

Our use of "business relationship" is intended to connote the entire 

relationship between the franchisor and the franchisee, beginning with 

the inception of the first franchise agreement and ending with the 

termination or nonrenewal of the final franchise agreement. "Franchise 

relationship", in contrast, is defined in S 2801(2) as "the respective 

motor 

fuel marketing or distribution obligations and responsibilities of a 

franchisor and a franchisee which result from the marketing of motor 

fuel under a franchise." Technically, a "franchise relationship", as it is 

defined in the PMPA, is tied to the franchise agreement, which the PMPA 

contemplates will periodically be modified and renewed. As that is not 

the idea we are trying to convey here, we have selected the term 

"business relationship". 

 12 
 termination) or at the end of such term (in the case of 

 nonrenewal);3 

There is no definition in the Act itself of the term 

"underlying lease". See S 2801. But the term "franchise" is 

defined, and it helps us determine what Congress meant by 

"underlying lease". A franchise is defined as "any contract 

between a refiner and a distributor, between a refiner and 

a retailer, . . . under which a refiner or distributor . . . 

authorizes or permits a retailer or distributor to use, in 

connection with the sale, consignment, or distribution of 

motor fuel, a trademark which is owned or controlled by 

such refiner . . . ." S 2801(1)(A). It includes "any contract 

under which a retailer or distributor . . . is authorized or 

permitted to occupy leased marketing premises . . . in 

connection with the sale, consignment, or distribution of 

motor fuel under a trademark which is owned or controlled 

by such refiner . . . ." S 2801(1)(B)(i). The statute 

contemplates that the franchise will be renewed (and 

perhaps modified) many times during the life of the

business relationship between the franchisor and the 

franchisee. Indeed, other sections of the PMPA anticipate a 

series of relatively short franchise terms between the 

franchisor and franchisee. Section 2802(b)(2)(E), for 

example, permits the franchisor to terminate or nonrenew 

a franchise based upon a decision in good faith and in the 

normal course of business to withdraw from the relevant 

geographic market area, so long as the franchise term is 

three years or longer. 

Examining the use of the term "franchise" in the context 

of S 2802(c)(4), particularly the notification provision, the 

Patels' contention that an underlying lease must predate 

the business relationship between the franchisor and the 

franchisee must be incorrect. Under S 2802(c)(4), the 

expiration of an "underlying lease" qualifies as a relevant 

_________________________________________________________________ 

3. This is the pre-October 1994 version of the statute. It applies here 

because both the 1987 sale and the 1994 nonrenewal occurred prior to 

the amendments enacted in that year. We note that the current version 

of S 2802(c)(4) contains a new subsection (B). The amendment modifies 

the relevant language quoted above only insofar as Congress moved all 

of the language in subsection (B) quoted above into the new subsection 

(A) and added new subheadings. See infra page 21. 

 13 
event exception "if the franchisee was notified in writing, 

prior to the commencement of the term of the then existing 

franchise." S 2802(c)(4) (emphasis supplied). This language 

leaves no doubt that Congress anticipated that an 

underlying lease could arise during the business 

relationship, thereby requiring the franchisor to notify the 

franchisee "prior to the commencement of the then existing 

franchise" in which the franchisor decides to terminate (or 

nonrenew) the franchise. If Congress had intended 

otherwise, the statute would logically have been written to 

require the franchisor to notify the franchisee prior to the 

"inception of the initial franchise" or the"existence of any 

business relationship between the franchisor and the 

franchisee," rather than the "then existing franchise." The 

words "then existing" are clear and they indicate to us that 

a qualifying underlying lease under S 2802(c)(4) could arise 

during the business relationship, so long as the franchisor 

notifies the franchisee before they enter into the next 

franchise agreement. Moreover, since the term "franchise" 

is used repeatedly throughout the PMPA, and is a defined 

term in S 2801, Congress's choice of language in 

S 2802(c)(4) cannot be ignored by this Court, even given the 

strong pro-franchisee tenor of the PMPA and its legislative 

history. See generally, Slatky, 830 F.2d at 478, 483; Patel 

V, 63 F.3d at 250. 

In sum, the plain meaning of the language in S 2802(c)(4), 

when read in context, is clear and we are bound by it. See 

United States v. Ron Pair Enters., Inc., 489 U.S. 235, 242 

(1989) (" `The plain meaning of legislation should be 

conclusive, except in rare cases [in which] the literal 

application of a statute will produce a result demonstrably 

at odds with the intentions of its drafters.' ") (quoting Griffin 

v. Oceanic Contractors, Inc., 458 U.S. 564, 571 (1982)). The 

term "underlying lease" refers to leases which underlie the 

franchise term, but not necessarily the entire business 

relationship between the franchisor and franchisee.

Therefore, under the facts of this case, the Lancaster-Sun 

leaseback was an underlying lease for the purposes of 

S 2802(c)(4) and potentially qualified Sun for an exception 

to PMPA liability. 

 14 
2. 

The second theory offered by the Patels is that, even if 

the Lancaster-Sun leaseback falls within the statutory 

definition of an "underlying lease" in S 2802(c)(4), we should 

simply read a new provision -- a so-called "sale-leaseback 

bona fide offer requirement" -- into the PMPA, see Patel VI, 

948 F. Supp. at 473, even though such a provision does 

not exist anywhere in the text or the legislative history of 

the statute. The Patels argue that, given our interpretation 

of Congress's intent to protect the "franchisee's reasonable 

expectations of continuing the franchise" and to "assure the 

franchisee an opportunity to continue to earn a livelihood 

from the property," see Slatky, 830 F.2d at 478, 484, Sun's 

actions are fundamentally at odds with the underlying 

purpose of the PMPA. In their view, Congress inadvertently 

left a "loophole" in the PMPA when it included a bona fide 

offer requirement under the sale provision in 

S 2802(b)(3)(D)(iii)(I), but left one out of the underlying lease 

provision in SS 2802(b)(2)(C) and 2802(c)(4). The Patels 

maintain that we would be justified in closing up this 

"loophole" by judicial fiat, because it allegedly permits 

unscrupulous franchisors to evade the bona fide offer 

requirement that Congress imposed on franchisors who 

wish to sell their leased marketing premises out from under 

their franchisees. 

The Patels carry a heavy burden in trying to convince us 

that the underlying purposes of the PMPA are so clear and 

conclusive that they justify our imposition of an additional 

requirement which, even the Patels admit, does not exist in 

the plain language of the statute. See Ron Pair, 489 U.S. at 

242. We have been down this path before and have 

consistently rejected the requests of the Patels and others 

to craft new protections eliminating so-called "gaps" in the 

PMPA. Most recently, in the course of this very litigation, 

we explained that "gap[s] in the provisions of the PMPA 

. . . should be corrected by Congress if Congress decides 

that [they] undermine its intent in passing the PMPA." Patel 

V, 63 F.3d at 253 (discussing the interrelationship between 

the underlying lease and the sale provisions, the same 

sections of the statute at issue here). Moreover, our position 

in Patel V was not novel. In Lugar, for example, we admitted 

 15 
that while there may be many strong policy reasons to read 

new pro-franchisee provisions into the PMPA, it was

Congress's responsibility to weigh the competing interests 

and make those determinations. See 755 F.2d at 59 ("[W]e 

cannot impose th[e] obligation [requiring franchisors to 

assign purchase options to their franchisees] where

Congress did not.").4 

Where Congress has "undert[aken] the delicate task of 

balancing the competing interests of fuel franchisors and 

their dealers," see id., we cannot impose new obligations on 

franchisors without any statutory basis simply because we 

prefer them, or because there are strong policy reasons for 

their adoption, or because they are pro franchisee. In the 

context of a detailed statutory structure such as the PMPA, 

we simply need much more evidence to satisfy us that 

"literal application of [the] statute will produce a result 

demonstrably at odds with the intentions of its drafters." 

Griffin, 458 U.S. at 571. The Act clearly says that a 

franchisor may rely on the expiration of an underlying lease 

as a valid exception to liability under the PMPA, so long as 

the franchisee is notified "prior to the commencement of the 

term of the then existing franchise."S 2802(c)(4) (emphasis 

supplied); see S II.B.1 supra. For the same reasons that we 

are convinced that the Lancaster-Sun leaseback qualifies as 

an "underlying lease" under S 2802(c)(4), we cannot

conclude that Congress inadvertently omitted creating a 

bona fide offer requirement from the underlying lease 

exception in (c)(4) when the lease is created during the 

business relationship between the franchisor and the 

franchisee. 

As discussed above and detailed in Slatky, the PMPA was 

created to balance the needs of franchisees, who have a 

_________________________________________________________________ 

4. We note in this regard that the oil franchisees have demonstrated 

their ability to get Congress's attention. See , e.g., S 2802(c)(4) (as 

amended 1994) (overturning our precedent in Lugar that permitted 

franchisors to rely on the expiration of an underlying lease defense to 

avoid PMPA liability even when their expiring leases contained 

unexercised options to renew or purchase that had never been offered to 

the franchisee); see also H.R. Rep. No. 737, 103d Cong., 2d Sess. (1994), 

reprinted in 1994 U.S.C.C.A.N. 2779; S. Rep. No. 387, 103d Cong., 2d 

Sess. (1994), available at 1994 WL 534750. 

 16 
" `reasonable expectation' of continuing the franchise 

relationship" if they do not engage in any misconduct, with 

the needs of the franchisors, who need " `adequate flexibility 

. . . to respond to changing market conditions and 

consumer preferences.' " 830 F.2d at 478 (quoting Senate 

Report at 19). Given these competing goals that Congress 

attempted to balance, we cannot conclude that the lack of 

a sale-leaseback bona fide offer requirement is 

"demonstrably at odds" with the rest of the PMPA. In fact, 

it appears to fit in comfortably with the rest of the 

provisions of the Act whose purpose it is to maintain 

franchisor flexibility to respond to new competitive 

conditions. Accordingly, we decline the Patels' entreaties to 

read new provisions in the PMPA that are plainly absent 

from the text of the statute and its legislative history. 

3. 

Sun contends that once we have defined the term 

"underlying lease" to include the Lancaster-Sun leaseback 

and rejected the Patels' suggestions to read new profranchisee provisions into the text of the PMPA, we must 

affirm the district court's grant of summary judgment in its 

favor. In its submission, all of the events in S 2802(c), 

including the "underlying lease" exception, are per se 

reasonable, obviating the ability of the courts to review the 

circumstances of the creation and expiration of underlying 

leasebacks. To Sun, this per se status means we may

conduct neither an objective nor a subjective inquiry into 

the events and decisions surrounding the creation of the 

Lancaster-Sun leaseback and the nonrenewal of the Patels' 

franchise under S 2802(c)(4).5 While we agree with Sun that 

_________________________________________________________________ 

5. An objective inquiry would require us to examine the reasonableness 

of Sun's decision to sell the leased marketing premises to Lancaster and 

take a six year leaseback, without first offering it to the Patels, as 

viewed 

from the perspective of a reasonable business person charged with 

making such decisions. Application of this standard would obviously be 

quite onerous because it would necessitate our reviewing and secondguessing the substantive merits of Sun's business decisions about where 

and how to best market its product. A subjective inquiry, however, would 

clearly be less intrusive from Sun's perspective because it only would 

 17 
a franchisor's reliance on S 2802(c)(4) is not subject to an 

objective reasonableness test, we nevertheless also

conclude that its decision must be subjectively "in good 

faith and in the normal course of business" to qualify for 

the "underlying lease" exception. Here, however, since the 

Patels have produced insufficient evidence to show bad 

faith on Sun's part in either creating the Lancaster-Sun 

leaseback or allowing it to expire, we ultimately conclude 

that Sun can avoid PMPA liability for nonrenewing the 

Patels' franchise under the "underlying lease" exception in 

S 2802(c)(4). 

a. 

First, we deal with the question whether S 2802(c)(4) is 

subject to an objective reasonableness test. We preface this 

discussion with the acknowledgment that Sun's submission 

that all of the S 2802(c) events are per se reasonable is 

meritless. There is no question that at least some of the 

S 2802(c) relevant event exceptions mandate some form of 

judicial scrutiny. See Sun Refining & Mktg. Co. v. Rago, 741 

F.2d 670, 673 (3d Cir. 1984) ("[I]n light of the Act's specific 

intent to benefit franchisees, we decline to construe 

S 2802(c) as a per se termination rule favoring 

franchisors."); Lugar, 755 F.2d at 59 (recognizing that a 

reasonableness inquiry into certain enumerated events 

under S 2802(c) dealing with franchisee misconduct was 

proper, but refusing to extend that rationale to S 2802(c)(4)); 

accord Marathon Petroleum v. Pendleton, 889 F.2d 1509, 

1512 (6th Cir. 1989) ("[W]e must scrutinize the 

reasonableness of terminations even when an event 

enumerated in S 2802(c) has occurred."). 

Sun's contention that courts are not authorized to second 

guess franchisors' decisions pursuant to the underlying 

lease exception in S 2802(c)(4) is grounded in our holding in 

_________________________________________________________________ 

require us to probe into Sun's state of mind when it decided to create an 

underlying leaseback with Lancaster. Under this standard, our focus 

would be on whether the franchisor entered into the leaseback for 

normal business reasons or simply in an effort to avoid the sale 

exception's bona fide offer requirement in S 2802(b)(3)(D)(iii)(I). 

 18 
Lugar that there is no statutory basis to inquire into the 

objective reasonableness of franchisor business decisions 

made in conformity with S 2802(c)(4). See 755 F.2d at 58. 

The Patels challenge the viability of Lugar, arguing that the 

decision is in conflict with our earlier opinion in Rago, 741 

F.2d at 673 (holding that the enumerated events in 

S 2802(c) are not per se reasonable), and that the 1994 

Amendment to S 2802(c)(4) not only overturned Lugar's 

result, but also fatally undermined its reasoning. We 

disagree. 

In Lugar, the franchisor, Texaco, had been leasing its gas 

station premises from a third party owner. Texaco in turn 

entered into a series of subleases with plaintiff Howard 

Lugar, its franchisee. The underlying lease granted Texaco 

an option to renew and an option to purchase the property 

at its expiration. When the underlying lease expired, Texaco 

opted neither to renew it nor purchase the premises from 

the third party owner. Texaco then informed Lugar that it 

was not renewing his franchise based upon the expiration 

of the underlying lease. Lugar asked Texaco to assign its 

options to him, so that he could continue his business at 

the same location, but Texaco refused and claimed 

protection from PMPA liability under S 2802(c)(4), the 

underlying lease exception. See Lugar, 755 F.2d at 54. 

Lugar sued, alleging that Texaco's reliance on S 2802(c)(4) 

was unreasonable because Texaco should at least have 

assigned its options to him. In effect, Lugar asked the 

Court to make an objective evaluation of the 

reasonableness of Texaco's business decision to refuse to 

assign him its options to renew the lease and purchase the 

property. We held that because Texaco's nonrenewal fit 

within S 2802(c)(4), an enumerated relevant event, the Act 

precluded us from evaluating the reasonableness of 

Texaco's action. See id. at 58. 

In Rago, in contrast, the plaintiff had been operating a 

service station for eight years under a series of franchise 

agreements with the same franchisor. With two years

remaining before the expiration of the then existing 

franchise agreement, the franchisor sent Rago a letter 

informing him that it intended to terminate his franchise. 

The franchisor's stated reasons were that Rago had failed to 

 19 
operate the station for a period of ten consecutive days and 

also that he had failed to pay rent and other sums due the 

franchisor in a timely manner. See Rago, 741 F.2d at 671. 

The franchisor relied on SS 2802(c)(8) and (9)(A) to avoid 

PMPA liability.6 Although the franchisee had committed a 

literal violation of these provisions, we held that S 2802(c) 

was not a per se termination rule and proceeded to analyze 

whether the circumstances surrounding the Rago's failures 

made it reasonable for the franchisor to terminate his 

franchise. See id. at 674. 

Contrary to the Patels' reading of Lugar and Rago, we 

perceive no conflict between the two opinions. As the panel 

in Lugar made clear, there is a patent difference between 

S 2802(c)(4), which deals with nonrenewal based upon a 

franchisor business judgment, and SS 2802(c)(8) and (9)(A), 

which concern nonrenewals based upon franchisee 

misconduct. Specifically, because (c)(8) and (9)(A) deal with 

"failures" by franchisees to do certain things (e.g., pay 

money in a timely manner and operate the service station 

for ten consecutive days), they therefore necessarily 

implicate S 2801(13), which defines the term "failure". See 

Lugar, 755 F.2d at 58 n.3. Because the term "failure" under 

the PMPA does not include "any failure for a cause beyond 

the reasonable control of the franchisee," S 2801(13)(B) 

_________________________________________________________________ 

6. Sections 2802(c)(8) and (9) allow the franchisor to terminate or 

nonrenew a franchisee for franchisee misconduct. In the context of 

S 2802(c), they read: 

 As used in subsection (b)(2)(C) of this section, the term "an event 

 which is relevant to the franchise relationship and as a result of 

 which termination of the franchise or nonrenewal of the franchise 

 relationship is reasonable" includes events such as -- 

* * * 

 (8) failure by the franchisee to pay to the franchisor in a timely 

 manner when due all sums to which the franchisor is legally 

 entitled; 

 (9) failure by the franchisee to operate the marketing premises for 

 -- 

 (A) 7 consecutive days, or 

 (B) such lesser period which under the facts and circumstances 

 constitutes an unreasonable period of time; . . . 

 20 
(emphasis supplied), the Rago panel was undoubtedly

correct to question whether there were any reasonable 

excuses justifying Rago's failures to keep his station open 

and pay his rent on time. Similarly, because S 2802(c)(4) 

justifies nonrenewal on the basis of the expiration of an 

underlying lease, not a franchisee "failure", the Lugar 

panel's refusal to engage in a reasonableness inquiry is 

equally understandable. 

Nor are we convinced by the Patels' argument that the 

1994 Amendment to S 2802(c)(4), which disturbed our

result in Lugar, constitutes a legislative repeal of its 

rationale. Under the amendment, franchisors must now 

offer to assign to their franchisees all options to extend 

underlying leases as well as any options to purchase the 

marketing premises, when certain conditions are met. See 

S 2802(c)(4)(B) (as amended 1994).7 While Sun concedes 

that the amendment overrules Lugar's result, it submits 

that Lugar's reasoning remains intact. If anything, Sun 

contends, because the amendment only narrowly revised 

S 2802(c)(4), and did not specifically require courts to 

evaluate the objective reasonableness of franchisor

decisions not to renew franchises based upon the 

expiration of underlying leases, Congress implicitly 

approved Lugar's reasoning and simply clarified the

circumstances when the expiration of an underlying lease is 

statutorily reasonable. While this question is difficult, 

because we find nothing in the text of the amendments or 

in the accompanying legislative history to the contrary, see 

H.R. Rep. No. 737, 103d Cong., 2d Sess. (1994), reprinted 

in 1994 U.S.C.C.A.N. 2779; S. Rep. No. 387, 103d Cong., 

2d Sess. (1994), available at 1994 WL 534750; 140 Cong. 

Rec. H10,575-76 (daily ed. Oct. 3, 1994); 140 Cong. Rec. 

H10,735 (daily ed. Oct. 4, 1994); 140 Cong. Rec. S14,236- 

37 (daily ed. Oct. 5, 1994), we believe Sun's 

characterization of Congress's intent to be more plausible, 

and we reject the Patels' attempts to graft a reasonableness 

test onto S 2802(c)(4) in direct conflict with our existing 

precedent. Therefore, we find that the 1994 Amendment to 

S 2802(c)(4) did not disturb our holding in Lugar that there 

is no objective reasonableness test under that section. 

_________________________________________________________________ 

7. Because of its length, we do not rescribe that amendment here. 

 21 
b. 

Our analysis of S 2802(c)(4) is not yet complete, however, 

because Sun contends that not only can there be no 

objective reasonableness inquiry into business decisions 

made pursuant to this section, but also that there can be 

no judicial inquiry whatever. The Patels, in contrast, urge 

that, based upon our decision in Slatky, we must consider 

whether Sun created the leaseback with Lancaster 

subjectively "in good faith and in the normal course of 

business." 

In Slatky, the franchisee had leased his gas station from 

Amoco for several years. After Slatky's sales had declined, 

Amoco decided not to renew his franchise on the ground 

that renewal would be uneconomical. To avoid PMPA 

liability, Amoco based its nonrenewal on 

S 2802(b)(3)(D)(i)(IV), which allows nonrenewal when 

"renewal of the franchise relationship is likely to be 

uneconomical to the franchisor despite any reasonable 

changes or reasonable additions to the provisions of the 

franchise which may be acceptable to the franchisee." This 

provision, like the sale of the marketing premises provision, 

requires the franchisor to make a bona fide offer to sell the 

premises to the franchisee. See S 2802(b)(3)(D)(iii)(I). 

In an attempt to satisfy this requirement, Amoco offered 

to sell the property to Slatky at what Slatky claimed was an 

unreasonable price, one significantly higher than the 

property's fair market value. See Slatky, 830 F.2d at 480. 

Amoco contended that to qualify as a "bona fide offer", it 

need only have made a subjectively sincere offer in good 

faith. Slatky countered that the offer must have been 

objectively reasonable. As the provision had no explicit 

standard, we conducted an independent inquiry into the 

bona fide offer requirement and, utilizing the logic 

discussed below, determined that an objective 

reasonableness standard applied. 

We reasoned as follows. Since the PMPA is a remedial 

statute, enforcement of its provisions demands at least a 

minimal level of judicial involvement. With the enactment of 

the statute, Congress outlawed all franchisee terminations 

and nonrenewals generally, but then created certain

 22 
exceptions. Congress bifurcated these exceptions into two 

broad categories: (1) franchisee misconduct, and (2) 

franchisor business judgments. See id. at 481; see also 

supra S II.A. The Act generally contemplates an objective 

reasonableness inquiry into terminations and nonrenewals 

based upon franchisee misconduct, and a subjective "in 

good faith and in the normal course of business" inquiry 

into franchisor business judgment cases. See id. We

examined provisions which, like the bona fide offer

requirement, did not contain explicit standards for judicial 

inquiry and determined that the courts must first 

categorize them in order to determine the proper inquiry. 

Ultimately, we concluded that since the determination of an 

offer price pursuant to the bona fide offer requirement was 

not a business determination, but rather a decision made 

by the franchisor "only because the statute requires it to do 

so," it was more akin to a franchise misconduct provision. 

We therefore applied an objective reasonableness standard. 

See id. 

In assessing the impact of our analysis in Slatky, it is 

critical to understand that although we noted (and 

enforced) the legislative intent to distinguish between 

franchisee misconduct and franchisor business decisions, 

our decision was predicated on the fact that both types of 

decisions warranted some type of judicial inquiry. Although 

Slatky concluded by applying an objective standard to the 

provision it considered, the impact of its analytical 

framework here is to mandate the application of a 

subjective good faith standard to the franchisor's decision 

to create a leaseback under S 2802(c)(4). As with the bona 

fide offer requirement at issue in Slatky, the underlying 

lease provision contains no explicit judicial inquiry 

standard. Therefore, we look to the nature of that provision 

to determine what standard is appropriate, and conclude 

that the decision to create an underlying lease (by selling 

the leased marketing premises and entering into leaseback) 

is a franchisor marketing decision (not unlike the decisions 

to sell the premises or withdraw from the relevant 

geographic market area). In contrast with the bonafide 

offer requirement, it is not based upon "a right created by 

the PMPA," and it is not analogous to a situation where a 

franchisee is terminated or nonrenewed for misconduct. See 

 23 
Slatky, 830 F.2d at 481. Therefore, the underlying lease 

provision contained in S 2802(c)(4) warrants the more 

lenient "in good faith and in the normal course of business" 

inquiry, not the objective reasonableness standard that is 

reserved for franchisor non-business decisions. 

Our conclusion that S 2802(c)(4) requires the franchisor 

to act in good faith and in the normal course of business is 

buttressed by the legislative history. The Senate Report 

states: 

 Expiration of the underlying lease could occur under a 

 variety of circumstances including, for example, a 

 decision by the franchisor not to exercise an option to 

 renew the underlying lease. However, it is not intended 

 that termination or nonrenewal should be permitted 

 based upon the expiration of a lease which does not 

 evidence the existence of an arms length relationship 

 between the parties and as a result of the expiration of 

 which no substantive change in control of the premises 

 results. 

Senate Report at 38, 1978 U.S.C.C.A.N. 896 (emphasis 

supplied). This passage illustrates several important points. 

First, Congress could not have meant S 2802(c)(4) to be a 

per se termination rule because Congress has specifically 

pointed out in the Senate Report at least one instance 

where the expiration of an underlying lease will not excuse 

the franchisor from liability for nonrenewing or terminating 

a franchise. Sun's argument that the preceding "snippet" of 

legislative history is consistent with a per se termination 

rule under S 2802(c)(4) (because it only says that non-arms 

length leases are not covered) is unconvincing -- either 

S 2802(c)(4) is a per se rule or it is not, and Congress has 

told us that it is not. 

Moreover, this legislative history seems to posit the kind 

of nonrenewal that appears to have occurred in Lugar (and, 

indeed in every other S 2802(c)(4) underlying lease case 

cited by Sun) -- namely, the expiration of an underlying 

lease that predates the inception of the business 

relationship between the franchisor and franchisee.8 The 

_________________________________________________________________ 

8. The viability of a limited-in-scope good faith test was not discussed 

in 

Lugar, and application of one here would arguably be in tension with 

 24 
legislative history does not, however, seem to contemplate 

a situation where (as here) the franchisor creates the 

"underlying lease" by selling the premises out from under 

the franchisee and taking a leaseback. Therefore, while the 

language of the statute permits these kinds of leasebacks, 

see S II.B.1 supra, given the potential for abuse, unfairness, 

and arbitrariness such practices could engender, we believe 

that this is exactly the sort of situation in which Congress 

sought to protect franchisees from franchisor bad faith. See 

Slatky, 830 F.2d at 482 (noting that the PMPA requires a 

good faith inquiry into franchisor business decisions to 

prevent sham transactions) (citing Senate Report at 37, 

U.S.C.C.A.N. at 896). 

Accordingly, we hold that, in the narrow circumstance 

where a franchisor has created a underlying lease through 

a sale-leaseback that takes place after the creation of the 

business relationship between the franchisor and 

franchisee, a subjective "in good faith and the normal 

_________________________________________________________________ 

some of our language in that opinion, see, e.g., Lugar, 755 F.2d at 58 

("It 

is of some significance that even where Congress did subject certain 

franchisor's decisions to judicial scrutiny, it eschewed a broad 

`reasonable business judgments' test," and instead adopted a two-fold in 

good faith and in the normal course of business test.). Lugar is 

distinguishable, however, because the underlying lease at issue there 

differed in an important way from the Patels' lease in that it predated 

the 

entire business relationship between Lugar and Texaco, rather than just 

the then extant franchise term. See Lugar, 755 F.2d at 54. Since Lugar 

knew that Texaco was leasing the property from a third party (and also 

knew that the lease might expire during his franchise relationship) when 

he first decided to contract with Texaco, the Court did not have to 

consider the possibility that Texaco might have acted in bad faith in 

creating the underlying lease. In contrast, since Sun created the lease 

during the franchise relationship here, it is at least conceivable that 

Sun 

could have done so in a bad faith effort to avoid the bona fide offer 

requirement of the sale exception. While the Patels' efforts to show that 

Sun acted in bad faith or outside of the ordinary course of business fail 

here, see infra, given the right factual predicate, a future plaintiff 

might 

prevail on this theory. Moreover, while the cited language might be read 

to indicate that the Lugar panel believed that S 2802(c)(4) was not one of 

the provisions to which Congress meant to apply the two-fold subjective 

test, the objective reasonableness issue was the only one before the 

Court. 

 25 
course of business" inquiry should be applied under

S 2802(b)(2)(C) and S 2802(c)(4), before the franchisor will be 

exempted from liability under the PMPA when its franchisor 

challenges the nonrenewal of its lease. If this inquiry is to 

have any effect at all, it must include the circumstances 

surrounding both the creation of the underlying lease and 

its eventual expiration. We can hypothesize several

instances in which franchisor conduct at the time it created 

the underlying lease would not satisfy this test and 

therefore would not qualify under S 2802(c)(4). Most 

obviously, as specifically contemplated in the legislative 

history, a franchisor who failed to make a bona fide offer to 

its franchisee would be liable for damages under the PMPA 

if it sold the leased marketing premises and created an 

underlying lease as part of a sham transaction that was not 

at arms length. Also, an inference of bad faith could be 

drawn by the fact finder if the franchisor executed a sale 

with a very short-term leaseback (on the order of a few 

months) and then attempted to terminate the franchisee 

without liability based on that extremely short underlying 

lease. Or, a court could find bad faith if the franchisor used 

the sale-leaseback gambit to terminate one franchise, only 

to enter into a new agreement with a different franchisee. 

Finally, an inference of bad faith might properly be drawn 

if the fact finder concluded that the franchisor intended to 

terminate the business relationship when it sold the 

premises, but that it took a leaseback (of any duration) 

simply to avoid the bona fide offer requirement. 

4. 

The Patels have alleged neither a sham transaction nor a 

suspiciously short leaseback, and Sun has not entered into 

a new franchise agreement to market motor fuel at the 

Patels' old franchise location with different franchisees. In 

fact, the only evidence the Patels put forth that might 

support a claim of bad faith is Lancaster general partner 

Bruce Robinson's testimony that Sun intended to terminate 

their franchise in 1987 at the time of the sale. The district 

court, however, found that this was insufficient evidence of 

bad faith to create a triable issue of fact. See Patel VI, 948 

F. Supp. at 475-76 & 477 n.6 ("No evidence has been

 26 
shown that Sun acted out of any bad faith desire to defeat 

the Patel's rights under the PMPA."). Given that Sun leased 

the premises to the Patels for over six years after selling it 

to Lancaster, this slender reed would not seem to be 

enough to satisfy the Patels' burden opposing summary 

judgment had we been presented with this issue in the first 

instance. See Anderson, 477 U.S. at 248-49 (noting that the 

non-moving party creates a genuine issue of material fact 

only by providing sufficient evidence to allow a reasonable 

jury to return a verdict in his favor). 

Moreover, as we have already noted, a previous panel of 

this Court has already definitively ruled on the question of 

Sun's bad faith, and we are bound by its decision as law of 

the case. In Patel V, the panel denied a motion by the 

Patels for a preliminary injunction based upon S 2805(e)(1), 

which "bars an injunction that would require a franchisor 

to continue a franchise in a location which the franchisor, 

in good faith and in the normal course of business, has 

decided to sell." 63 F.3d at 252. By grounding its 

affirmance in S 2805(e)(1), the prior panel a fortiori also 

concluded that the transaction was made in good faith and 

in the normal course of business. See id. at 253 & n.8. This 

determination by an earlier panel constitutes the law of the 

case, and we are barred from reconsidering it. See Atlantic 

Coast Demolition & Recycling, Inc. v. Board of Chosen 

Freeholders of Atlantic County, 112 F.3d 652, 663 (3d Cir. 

1997) (citations omitted).9 

C. 

The Patels make one final argument that merits our 

analysis. They contend that the prior panel, while rejecting 

their request for injunctive relief, also decided the merits of 

the damage claim in their favor. The Patels base this 

contention on the next to the last paragraph in Section 

_________________________________________________________________ 

9. There are three traditional exceptions to this doctrine, including 

situations in which: (1) new evidence is available; (2) a supervening new 

law has been announced; or (3) the earlier decision was clearly 

erroneous and would create manifest injustice. See Public Interest 

Research Group of New Jersey, Inc. v. Magnesium Elektron, Inc., 123 

F.3d 111, 116-17 (3d Cir. 1997) (citations omitted). None of these apply. 

 27 
III(B) of Patel V. See 63 F.3d at 253. There, the majority 

stated: 

 Clearly, one cannot help but feel some sympathy for 

 the Patels. At the time of their initial attempt to obtain 

 injunctive relief, they were sent away and told to seek 

 such relief when their franchise was not renewed. Now, 

 having returned to court after the occurrence of the 

 nonrenewal, they are told that they are not eligible for 

 injunctive relief. The Patels still have, however, the 

 opportunity to present to the district court their 

 contention that the nonrenewal of their franchise 

 violates S 2802 because the reason given for

 nonrenewal, the expiration of the underlying lease, was 

 a condition created by the franchisor when it sold the 

 property without offering the franchisee an opportunity 

 to purchase it. Even if injunctive relief is no longer 

 available to the Patels, the PMPA does provide for 

 awards of damages and fees to a franchisee who is 

 successful in a civil action against a franchisor. 15 

 U.S.C. 2805(d) and (e). 

Id. In the footnote following this passage, the Patel V 

majority continued: 

 The dissent states that "[t]he majority holds that the 

 franchisor's obligation to offer to sell to the franchisee 

 can be avoided simply by postponing the nonrenewal or 

 termination of the franchise to a time subsequent to 

 the title closing." Dissent op. at 253; see also id. at 258 

 ("The majority opinion, however, holding that a sale- 

 without-offer followed by expiration of an underlying 

 lease makes nonrenewal reasonable, allows franchisors 

 to completely dispense with the bona fide offer 

 requirement."). We do not so hold. Instead, we hold 

 that a franchisor that fails to offer the property to its 

 franchisee before selling to another is liable to the 

 franchisee for damages, but may not be enjoined from 

 the sale, provided the transaction is made in good faith 

 and in the normal course of business, with the 

 requisite notice. 

Id. at 253 n.8 (emphasis supplied). Although the 

highlighted language in the quoted footnote from Patel V 

 28 
purports to "hold" that a franchisor that fails to offer its 

property to the franchisee before selling "is liable" without 

regard to the franchisor's good faith (or even an inquiry into 

the objective reasonableness of the nonrenewal)-- in other 

words that there is a "sale-leaseback offer requirement" 

implicit in the PMPA which nullifies the lease-expiration 

defense set forth in S 2802(c)(4) -- we conclude that that 

statement is dictum, and we decline to follow it.10

The issue before the Court in Patel V was "whether 

injunctive relief is still an available remedy for[the Patels] 

against [Sun]." 63 F.3d at 249. To that end, the Court 

determined that S 2805(e)(1) barred the preliminary

injunction the Patels sought because Sun had acted in 

good faith and in the ordinary course of business. See id. 

at 252. Nothing in Patel V's footnote eight was integral to 

our holding there; in fact, the footnote itself appears to 

have been drafted in response to criticism from the dissent 

about issues that were not directly before us. A statement 

such as this is dictum. See Sarnoff v. American Home Prods. 

Corp., 798 F.2d 1075, 1084 (7th Cir. 1986) (defining dictum 

as "a statement in a judicial opinion that could have been 

deleted without seriously impairing the analytical 

foundations of the holding -- that, being peripheral, may 

not have received the full and careful attention of the court 

that uttered it").11 Based upon these circumstances, 

combined with our observation that the majority in Patel V 

engaged in no analysis of the Patels' novel claim for 

damages under S 2802 (in contrast with its detailed

discussion of the availability of injunctive relief), we do not 

regard the highlighted language in footnote eight of Patel V 

as controlling. 

_________________________________________________________________ 

10. We note that Judge Scirica, who was a member of that panel, joins 

in this opinion. 

11. As dictum, there are many reasons why we should not give it weight 

here: (1) it may not have been as fully considered as it would have been 

if it were essential to the outcome; (2) sloughing it off in a new opinion 

will not affect the analytic structure of the original opinion; and (3) 

the 

dictum may lack refinement because it was not honed through the fires 

of an adversary presentation. See United States v. Crawley, 837 F.2d 

291, 292-93 (7th Cir. 1988). 

 29 
III. 

In conclusion, we find that Sun's decision to create an 

underlying lease through a sale-leaseback that took place 

after the creation of the business relationship was subject 

to an "in good faith and the normal course of business" 

inquiry under SS 2802(b)(2)(C) and 2802(c)(4) before it could 

be exempted from liability under the PMPA. We also 

conclude that Sun has already satisfied that test because 

the Patels have adduced insufficient evidence of bad faith. 

The judgment of the district court will therefore be affirmed. 

A True Copy: 

Teste: 

 Clerk of the United States Court of Appeals 

 for the Third Circuit 

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