Opinion ID: 777182
Heading Depth: 2
Heading Rank: 2

Heading: Materiality of El-Khoury's Violation Under the Applicable Provisions

Text: 20 The district court held that only subsection (b)(2)(A) requires Chevron to prove that the ground for termination is of material significance. Under the district court's analysis, the importance of the breach to the franchise relationship is not relevant under subsection (b)(2)(C). El-Khoury did not dispute that he had knowingly failed to comply with state-tax laws pertaining to the franchise. Because an event specifically enumerated in § 2802(c)(11) had occurred, the district court concluded that termination was permissible under subsection (b)(2)(C) as a matter of law. 21 In so holding, the court erred. Subsection (b)(2)(A) uses the word failure, and (b)(2)(C) incorporates it by reference. The statutory definition of failure necessarily requires an inquiry into the significance of the violation. That definition excludes any failure that is only technical or unimportant to the franchise relationship. 15 U.S.C. § 2801(13)(A). The event listed in § 2802(c)(11) refers to a failure to comply with state law. The term failure as it is used there must have the statutory meaning set out in § 2801(13). We so hold because the definitions found in 15 U.S.C. § 2801 apply to the listed terms [a]s used in this subchapter, without exception. Section 2802 appears in the same subchapter as § 2801, and nothing in § 2802 excludes any use of the term failure from the general definition found in 15 U.S.C. § 2801(13) either expressly or by necessary implication. See Sun Ref. & Mktg. Co. v. Rago, 741 F.2d 670, 673 (3d Cir. 1984) (holding that the failures listed in § 2802(c) must be construed in harmony with the definition of failure in § 2801(13)). 22 By excluding technical or unimportant breaches from the definition of failure, Congress expressed its intent that technical or minor violations of the contract should not allow a franchisor to terminate a franchise. S.Rep. No. 95-731, at 18 (1978). Considering termination an extreme remedy, Congress intended to restrict that remedy to contractual violations that are so serious as to undermine the entire relationship. Id. 23 The materiality of El-Khoury's violation is thus relevant to both of the pertinent subsections allowing for termination of a franchise. With respect to subsection (b)(2)(A), El-Khoury's failure to pay state sales tax did violate the provision of the Dealer Agreements that requires compliance with federal, state, and local laws. However, in order for termination to be proper on that ground, the text of subsection (b)(2)(A) requires that the violated provision be both reasonable and of material significance to the franchise relationship. In addition, subsection (b)(2)(A) requires that the franchisee's violation be a failure to comply with some provision of the franchise; the definition of failure in turn excludes a violation that was technical or unimportant to the franchise relationship. 24 Subsection (b)(2)(C) requires a similar inquiry where, as here, the relevant event is an alleged failure to comply with law under § 2802(c)(11). Consistent with the statutory definition, the term failure excludes violations that are only technical or that are unimportant to the franchise relationship. 15 U.S.C. § 2801(13)(A). El-Khoury does not argue, nor do we conclude, that a failure to pay state sales tax arising from the operation of the franchise is only technical. But, if El-Khoury's failure to pay state sales tax was unimportant to the franchise relationship, it still could not constitute a failure within the meaning of § 2802(c)(11). 25 We emphasize that not every ground for termination under the PMPA requires an inquiry into materiality. Rather, we examine the text of the provision at issue to see whether Congress has required a showing of materiality to permit the termination of a franchise. 26 Our holding today is consistent with Atlantic Richfield Co. v. Guerami, 820 F.2d 280 (9th Cir.1987). There, we held that it was not necessary to determine whether a violation was serious enough to warrant termination under subsection (b)(2)(C) if an event listed under § 2802(c) had occurred. Id. at 283. In Guerami, the franchise was terminated because the franchisee had been convict[ed] ... of [a] felony involving moral turpitude. 15 U.S.C. § 2802(c)(12). Section 2802(c)(12) does not use the term failure. In Guerami, there was no question that an event enumerated in § 2802(c) had occurred. 820 F.2d at 283. 27 Here, that is precisely the question: If El-Khoury's failure to pay state taxes was a failure as defined by the PMPA, then an enumerated event occurred and termination is proper under § 2802(c)(11). By contrast, if the sales-tax violation was unimportant to the franchise relationship, no failure and thus no event occurred, and termination is not permissible. 28