Opinion ID: 495233
Heading Depth: 1
Heading Rank: 3

Heading: Amoco's Subjective Good Faith Standard

Text: 21 Amoco's principal contention is that we should interpret the term bona fide to require that a distributor make its offer only in subjective good faith. Amoco grounds this argument on an analogy between the distributor's determination of an offer price and its original determination not to renew a franchise because of a business reason permitted under Sec. 2802(b)(3)(D). The statute requires only that the latter decision be made in good faith and in the normal course of business. Id. The Senate Report states: 22 These tests provide adequate protection of franchisees from arbitrary or discriminatory termination or non-renewal, yet avoid judicial scrutiny of the business judgment itself. Thus, it is not necessary for the court to determine whether a particular marketing strategy, such as a market withdrawal, or the conversion of leased marketing premises to a use other than the sale of distribution of motor fuel, is a wise business decision. 23 Senate Report at 37, U.S.Code Cong. & Ad.News 1978, at 896. Contending that the decision about an offer price is essentially the same kind of business judgment as a decision not to renew the franchise, Amoco claims that the same good faith standard designed to prevent second-guessing of a distributor's business judgment should apply. 24 We reject Amoco's suggestion for several reasons. First and fundamentally, we disagree with Amoco's basic analogy between a nonrenewal decision on the one hand and the determination of a bona fide offer price on the other. We have noted that Congress wished distributors to have the flexibility to respond to changing market conditions: when making a nonrenewal decision under Sec. 2802(b)(3)(D), distributors make such a marketing decision. So long as nonrenewal was truly based on such a marketing decision, Congress precluded courts from examining its merits. Congress did not, however, preclude courts from scrutinizing the merits of termination or nonrenewal decisions that result from a franchisee's misconduct. Whether a franchisee has truly created health or safety violations or violated a term of the franchise agreement is a question the courts may examine freely. Congress thereby distinguished between decisions involving general business matters and decisions turning on a right created by the PMPA. 25 Like a termination or nonrenewal decision for franchisee misconduct, the determination of an offer price is not a business decision. It is not a decision that the distributor decides on its own to make. Rather, the distributor sets a bona fide price only because the statute requires it to do so. Indeed, when a distributor fails to renew a franchise because of a decision to convert a property to a different use, or to alter the premises, see Sec. 2802(b)(3)(D)(i)(I), (II), selling the property will interfere with its business plans. The determination of an offer price therefore represents something we may call a compliance judgment, a judgment about how best to protect the company's interests while complying with the statute. Congress did not instruct the courts to defer to such decisions. 26 The legislative history reveals this distinction. Under H.R. 1300 (94th Cong), the predecessor to Title I of the PMPA, a franchisee could not obtain injunctive relief if the franchisor failed to renew on the basis of a determination made by the franchisor in good faith and in the normal course of business even if such nonrenewal was prohibited under the bill. H.R. 1300 Sec. 105(e)(1)(A). But such nonrenewal decisions were remediable with money damages, which would have compensated the franchisee for the loss of its reasonable expectation of renewal. Id. Sec. 105(e)(2). 27 Under H.R. 1300, the distributor could mitigate damages by making a bona fide offer. Responding to the pleas of the major oil companies, see, e.g., Hearings on H.R. 130, Senate Subcomm. on Energy Conservation and Regulation of the Energy and Natural Resources Committee, Publ. No. 95-61, 250 (95th Cong., 1st Sess.) (statement of Duval Pickey, Vice President of Marketing for Exxon), the next Congress made a bona fide offer a surrogate for damages, H.R. 130 (95th Cong.), and that provision became law. Under either bill, however, Congress treated the bona fide offer requirement not as a statutory recognition of a business judgment but as a form of compensation to the franchisee for the harm resulting from the distributor's valid business judgment. We would misread that legislative history and permit distributors to eat their cake and have it too if we were to defer not only to the business merits of the distributor's business judgment but also to the distributor's sense of the fairness of its offer of compensation. 28 Second, even assuming the correctness of the analogy between nonrenewal decisions and offer price decisions, Amoco confuses procedural restrictions with substantive ones. The substantive restriction on the nonrenewal decision comes from the limitation on the distributor's grounds for renewal. The good faith and normal course of business requirement is essentially a procedural direction to the courts about how to judge whether the distributor has abided by the substantive restrictions and failed to renew only because of one of the statutorily permissible reasons. Thus, what the court decides in a challenge to a nonrenewal decision is not whether the distributor determined not to renew according to some elusive notion of good faith but whether it sincerely made a decision to sell the property or to alter it or to accomplish some other business purpose permitted under the statute. See Senate Report at 37, U.S.Code Cong. & Ad.News 1978, at 896 (good faith test is meant to preclude sham determinations). 29 Amoco's suggestion that the statute only requires a distributor to determine an offer price in good faith takes this procedural standard of judicial scrutiny and turns it into a substantive restriction on the distributor's behavior. But a mere requirement to make an offer in good faith is essentially without content. Failing to suggest what a distributor must sincerely decide, it suggests only some kind of floating goodwill. Because it is so ephemeral, a franchisee would virtually never be able to show its absence. Even if we were to accept Amoco's analogy between the offer price decision and a decision not to renew a franchise, we would therefore adopt the good faith standard only as a standard of judicial scrutiny. In order to decide whether the distributor had made the offer price in good faith, we would still have to decide what kind of offer price the statute requires.
30 Apart from its analogy between the bona fide offer provision and the decision not to renew a franchise, Amoco claims that a subjective good faith standard is consistent with the general purposes of the statute. According to Amoco, the statute seeks only to prevent arbitrary and discriminatory terminations and nonrenewals while otherwise leaving the distributor unfettered discretion to pursue its own economic self-interest. By requiring only that a distributor make an offer in good faith, Amoco claims, courts can prevent discriminatory conduct while otherwise allowing distributors to act in accordance with their self-interest. 31 This reading of the statute's requirements, however, trivializes Congress's goals. Distributors have no reason to mistreat franchisees out of simple spite, and Congress did not attribute any such motivation to them. The Senate Report makes clear that the arbitrary and discriminatory terminations and nonrenewals Congress wished to stop were those aimed at forcing the franchisee to accept marketing practices not set out in the franchise agreement. Senate Report at 12-19, 36-37, U.S.Code Cong. & Ad.News 1978, at 873-877, 894-896. Obviously, Congress found that distributors had been using their power over franchisees to further their own self-interest. In remedying this disparity in bargaining power by limiting the grounds for termination and nonrenewal, Congress protected the franchisee's interests by curbing those of the distributor. Senate Report at 18, U.S.Code Cong. & Ad.News 1978, at 876. 32 Other provisions also quite explicitly restrict a distributor's self-interest in favor of franchisees. In particular, Congress proscribed a distributor from terminating or failing to renew a franchise for the purpose of transferring a property to direct management by its own employees. See Sec. 2802(b)(2)(E)(ii), Sec. 2802(b)(3)(D)(ii). These provisions in part address Congress' fear that major distributors were engaging in predatory pricing to drive independents out of business. See Cong.Rec. S12761-62 (daily ed. May 5, 1978) (statement of Sen. Durkin). But these provisions also reflect Congress' concern that the major distributors' desire to operate their own stations resulted in their pressing franchisees to sell out or face stiff increases in rent. See 123 Cong.Rec. H10,385 (daily ed. April 5, 1977) (statement of Rep. Conte). By protecting in this way the franchisee's interest in continuing to earn a livelihood from the franchise property, Congress limited the ability of the distributor to shift to more profitable direct management. 33 As these specific provisions illustrate, the very act of passing the PMPA indicated Congress's rejection of the view advanced by the major gasoline retailers that remedial legislation was unnecessary because the interests of distributors and franchisees were in harmony. See, e.g., Senate Hearings, supra, at 319-22 (statement of Kenneth E. Curtis, Vice-President of Marketing for Amoco). While a subjective good faith standard would probably enable distributors to pursue their own, unfettered self-interest, the statute does not generally guarantee distributors that right. We therefore reject this goal as a guiding principle for interpreting the bona fide offer provision.