Court Opinion

ID: 2963708
Source: CourtListenerOpinion
Date Created: 2015-09-21 21:14:09.971913+00
Date Added: 2024-06-11T15:01:25.900454
License: Public Domain

USCA1 Opinion

	

          October 26, 1995      [NOT FOR PUBLICATION]

                            UNITED STATES COURT OF APPEALS
                                FOR THE FIRST CIRCUIT

                                                     
                                 ____________________

        No. 95-1314

                                  SHELL OIL COMPANY,

                                Plaintiff, Appellant,

                                          v.

                                K.E.M. SERVICE, INC.,

                                 Defendant, Appellee.

                                                     
                                 ____________________

                     APPEAL FROM THE UNITED STATES DISTRICT COURT

                           FOR THE DISTRICT OF RHODE ISLAND

                    [Hon. Francis J. Boyle, Senior District Judge]
                                            _____________________

                                                     
                                 ____________________

                                Cyr, Boudin and Lynch,

                                   Circuit Judges.
                                   ______________

                                                     
                                 ____________________

             George A. Nachtigall, with whom Mark A. Pogue, Marc A. Crisafulli
             ____________________            _____________  __________________
        and Edwards & Angell were on brief for appellant.
            ________________
             Paul J. Pisano, with  whom Paul J. Pisano Law  Associates, Albert
             ______________             ______________________________  ______
        R. Romano and Romano, Spinella & Hayes were on brief for appellee.
        _________     ________________________

                                                     
                                 ____________________

                                                     
                                 ____________________

                    Per Curiam.   Shell  Oil Company ("Shell")  sued, under
                    Per Curiam.
                    ___ ______

          the  Petroleum Marketing Practices Act, 15 U.S.C.    2801 et seq.
                                                                    __ ____

          ("PMPA"),  to terminate  its franchise  agreement and  lease with

          K.E.M. Service,  Inc. ("K.E.M.")  due to alleged  contract viola-

          tions.  K.E.M. counterclaimed, and  Shell now appeals a  prelimi-

          nary  injunction requiring  it  to continue  selling gasoline  to

          K.E.M. pending final adjudication  of Shell's PMPA-based  claims.

          See Shell Oil Co. v. K.E.M. Serv., Inc., No. 95-001B (D.R.I. Feb.
          ___ _____________    __________________

          16, 1995).   As the record  does not enable a  determination that

          the district  court manifestly  abused its discretion  in finding

          that  "there exist  sufficiently serious  questions going  to the

          merits [of  Shell's claims and  K.E.M.'s defenses]  to make  such

          questions a fair  ground for litigation," 15 U.S.C.   2805(b)(A),

          we affirm.

                    We state  the material facts  briefly.  K.E.M.  and its

          president/owner,  John Gorter,  operate a  Shell retail  gasoline

          station in East Greenwich, Rhode Island.  Their current five-year

          franchise and lease agreement (hereinafter:  "Agreement") expires

          in 1998.   According to K.E.M., Shell decided in  1993 to install

          another  franchisee  on  the  leased premises,  and  when  Gorter

          declined  a buy-out offer, Shell initiated  a bad-faith effort to

          oust  K.E.M. prematurely from its  franchise/lease.  To this end,

          Shell  audited and cited  K.E.M. for  violations of  Rhode Island

          environmental regulations, specifically for its failure to keep a

          written record of daily gasoline inventory reconciliations on the

          leased premises.  Further,  Shell abruptly altered its longstand-

                                          2

          ing  policy of delivering "short  loads"    i.e.,  less than full

          tank-truck  loads  of gasoline     to  K.E.M.   Since  K.E.M. has

          limited underground  storage-tank capacity, it was  forced to buy

          and  sell non-Shell gasoline in short loads, or else cease opera-
                    ___

          tion.

                    Shell contends that its alleged bad faith is irrelevant

          under  the  PMPA, given  that  K.E.M. admittedly  engaged  in the

          "willful adulteration, mislabeling or  misbranding of motor fuels

          or other  trademark violations."   15  U.S.C.    2802(c)(10); see
                                                                        ___

          Agreement Art. 18.1(c)(10) (same).  Shell also argues that, in at

          least  two respects, K.E.M. "knowing[ly] fail[ed] . . . to comply

          with .  .  . State  .  . .  [environmental]  laws or  regulations

          relevant to the operation of the marketing premises," 15 U.S.C.  

          2802(c)(11); Agreement  Art. 18.1(c)(11) (same).  First, although

          K.E.M.  kept gasoline  inventory  figures and  performed a  daily

          inventory reconciliation, it failed to record the final amount of

          any  differential in its written records.  See Rhode Island Dep't
                                                     ___

          of Envtl.  Management  Regulation DEM-DWM-UST04-93,     13.00  et
                                                                         __

          seq.  (1993).  Second, K.E.M.'s records were in the possession of
          ____

          its  accountant, rather than at the service station.  Shell cites

          case law to the effect that a franchisor's unilateral termination

          of a franchise is conclusively presumed "reasonable," as a matter

          of law and regardless whether the motives for the termination are

          unfairly coercive  or sinister,  if the franchisee  has committed

          any of the twelve acts enumerated in PMPA   2805(c).   See, e.g.,
          ___                                                    ___  ____

          Russo v. Texaco, 808 F.2d 221, 225 (2d Cir. 1986). 
          _____    ______

                                          3

                    K.E.M. counters  that PMPA    2802(c)  contemplates two

          types of equitable exceptions to  the presumption prescribed in  

          2805(c).   First, any purported PMPA  recordkeeping violation was

          merely  "technical," since  K.E.M.  substantially  complied  with

          Rhode Island environmental regulations.  Second, Shell  pressured

          K.E.M.  into violating  the PMPA  ban on gasoline  misbranding by

          preying on  its hand-to-mouth  fiscal condition when  it abruptly

          changed its  longstanding course of dealing  regarding deliveries

          of "short loads."   K.E.M. contends that it faced  an irresoluble

          dilemma:   either buy non-Shell gasoline for resale, or cease its

          retail operation for  more than seven days,  thereby committing a

          separate violation  constituting an independent  ground for fran-

          chise termination.  See 15 U.S.C.   2802(c)(9).  
                              ___

                    An appellant challenging a preliminary  injunction must

          bear  the  "heavy  burden" of  showing  that  the  district court

          committed a mistake  of law  or a manifest  abuse of  discretion.

          Gately  v. Commonwealth  of Mass.,  2 F.3d  1221, 1225  (1st Cir.
          ______     ______________________

          1993), cert.  denied, 114  S. Ct.  1832 (1994); see  28 U.S.C.   
                 _____  ______                            ___

          1292(a)(1).   Due  deference must be  accorded the  ruling below,

          since the district court is "steeped in the nuances of a case and

          mindful of the  texture and scent of the evidence."  K-Mart Corp.
                                                               ____________

          v. Oriental Plaza, Inc., 875 F.2d 907, 915 (1st Cir. 1989).
             ____________________

                    Under the  PMPA, preliminary injunctive relief  is more

          readily available to franchisees than was the case at common law.

          See, e.g., Narragansett Indian  Tribe v. Guilbert, 934 F.3d  4, 5
          ___  ____  __________________________    ________

          (1st Cir. 1991) (describing  four-part, common law standard); but
                                                                        ___

                                          4

          cf.  Nassau Boulevard Shell Serv. Station, Inc. v. Shell Oil Co.,
          ___  __________________________________________    _____________

          875 F.2d 359,  364 (2d  Cir. 1989) (noting  that PMPA  franchisor
                                                                 __________

          must  meet  traditional, four-part  test for  preliminary injunc-

          tion).   Because  the PMPA  is a remedial  statute, see  infra, a
                                                              ___  _____

          franchisee  need not demonstrate  a likelihood of  success on the
          __________

          merits, but  merely that the franchisor  terminated the franchise

          and that "there exist sufficiently serious questions going to the
                                ____________ _______ _________

          merits to make such  questions a fair ground for  litigation." 15
                                           ____ ______ ___  __________

          U.S.C.   2805(b)(1)(A) (emphasis  added).  See, e.g., Doebereiner
                                                     ___  ____  ___________

          v. Sohio Oil Co., 880 F.2d 329, 332 (11th Cir. 1989), modified on
             _____________                                      ________ __

          other grounds, 893  F.2d 1275  (1990); Sun  Ref. &  Mktg. Co.  v.
          _____ _______                          ______________________

          Rago, 741 F.2d 670, 673 (3d Cir. 1984).1
          ____

                    Based  on a careful evaluation  of the record below, we

          cannot  conclude  that  the  district court  either  committed  a

          mistake of law or  abused its discretion in ruling  that K.E.M.'s

          proposed defenses were "sufficiently serious" to constitute "fair

          ground[s] for  litigation."  Contrary to  Shell's contention, the

          question whether the PMPA  admits of "equitable" exceptions which

          would excuse a franchisee's noncompliance with state  environmen-

          tal regulations or its gasoline  misbranding are matters of first

          impression in this circuit,  upon which we express no  opinion at

                              
          ____________________

               1PMPA   2805(b)(2)(B) does require  the court to balance the
          relative hardships to the parties in granting or denying prelimi-
          nary  injunctive relief.  Shell does not challenge this aspect of
          the district court ruling.  See Shell Oil Co., No.  95-001B, slip
                                      ___ _____________
          op. at 15 (D.R.I. Feb. 16, 1995). 

                                          5

          this juncture.2  

                    Proper  resolution of  these  important  matters     if

          necessary    requires a more thorough exposition of the course of

          dealing between  the  parties during  their  nine-year  franchise

          relationship.   For  example,  section 2805(c)(11)  proscribes  a

          franchisee's "knowing failure" to comply with state law.  Section
                                _______

          2801(13),  however,   defines "failure"  to exclude  "any failure
                                                      _______

          which is only technical or unimportant to the franchise relation-
                        _________

          ship."   15 U.S.C.    2801(13)(A).  Although  Shell contends that

          K.E.M.'s violation  was not  "technical," it adduced  no evidence

          that  it had  ever threatened  to terminate  or terminated  other

          franchisees for comparable regulatory noncompliance, nor that the

          State  of Rhode Island had ever cited  or fined a service station

          owner for these types of violations. See S. Rep. No. 95-731, 95th
                                               ___

          Cong.,  2d Sess.  15,  reprinted in  1978  U.S.C.C.A.N. 873,  874
                                 _________ __

          (noting that Congress designed the PMPA  with the general purpose

                              
          ____________________

               2Our decision in Desfosses v. Wallace Energy, Inc., 836 F.2d
                                _________    ____________________
          22 (1st  Cir. 1987), deals with PMPA   2802(c)(4), and not with  
          2802(c)(10) or (11).  Although we there referred in general terms
          to  the "conclusive  presumption  of  reasonableness" theory  set
          forth in Russo, supra,  Desfosses had not defended on  the ground
                   _____  _____                 ___
          that  the franchisor had based its termination or nonrenewal on a
          purely "technical"  violation of state  law, nor  that the  fran-
          chisor's  own conduct  had coerced  Desfosses into  violating the
          PMPA.  Indeed,   2802(c)(4) does not pertain to violative acts of
                                                                         __
          the  franchisee, but  to  acts entirely  within the  franchisor's
          ___  __________                          ______ ___  ____________
          control.  15 U.S.C.    2802(c)(4)  (providing for  termination or
          _______
          nonrenewal upon  the "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 . . . of the duration of the  underlying lease
          . . . .").  Desfosses simply claimed that Wallace had not provid-
          ed him with the requisite notice.  Desfosses, 836 F.2d at 26.
                                    ______   _________

                                          6

          to protect "franchisees from  arbitrary and discriminatory termi-
                                        _________

          nations or  non-renewals of their franchises")  (emphasis added).

          At this juncture, we conclude that K.E.M.'s alleged lapses are at

          least arguably de  minimis.   Since K.E.M. does  possess the  raw
                         __  _______                                    ___

          gasoline  inventory data    in  written form     with which State
          ________  _________ ____

          auditors could  test its daily inventory  reconciliations, we can

          discern no manifest  abuse of  discretion in  the district  court

          ruling  that  the  "technicality"  of this  asserted  ground  for

          termination presented  K.E.M. with  a colorable defense,  i.e., a

          "fair  ground for litigation."   See Shell Oil  Co., No. 95-001B,
                                           ___ ______________

          slip op. at 13 (D.R.I. Feb. 16, 1995).

                    Similarly, "Congress  enacted PMPA to  avert the detri-

          mental effects  on the  nationwide  gasoline distribution  system

          caused by  the  unequal bargaining  power  enjoyed by  large  oil

          conglomerates  over  their  service-station franchisees."    Four
                                                                       ____

          Corners Serv. Station, Inc. v. Mobil  Oil Corp., 51 F.3d 306, 310
          ___________________________    ________________

          (1st  Cir. 1995). See Desfosses v. Wallace Energy, Inc., 836 F.2d
                            ___ _________    ____________________

          22, 25  (1st Cir.  1987)  (noting that  PMPA  "'must be  given  a

          liberal construction  consistent with its  overriding purpose  to

          protect franchisees'") (citing  Brach v. Amoco Oil  Co., 677 F.2d
                                          _____    ______________

          1213, 1221  (7th Cir. 1982)).   It also left "'to  the courts the

          task of resorting to traditional principles of equity to maximize

          attainment of  the  competing statutory  objectives  consistently

          with . . . the purposes of the [PMPA].'"  Shell Oil Co. v. K.E.M.
                                                    _____________    ______

          Serv., Inc., No. 95-001B, slip  op. at 11 (D.R.I. Feb. 16,  1995)
          ___________

          (quoting  S. Rep. No.  95-731).  Accordingly,  were discovery and

                                          7

          trial to disclose that Shell knowingly took inequitable advantage

          of K.E.M.'s  precarious market  position and  inferior bargaining

          position, the question  whether Congress contemplated "equitable"

          exceptions  to section 2802(c)(10)'s "willful misbranding" prohi-

          bition would be presented on a fully developed factual record. 

                    Finally, equitable  relief from section  2802(10) might

          be  considered more  appropriate  were K.E.M.  to demonstrate  at

          trial that Shell had breached the Agreement first, leaving K.E.M.

          with the  Hobson's choice of  buying non-Shell gasoline  or going

          out of business. The Agreement expressly provides that Shell  has

          no contractual obligation to deliver "short loads" to K.E.M.  See
                                                                        ___

          Agreement Art. 9.1.   On  the other hand,  Shell abruptly  ceased

          providing K.E.M with  "short loads" after  a nine-year course  of
                                              _____

          dealing.   Course  of  dealing may  be  competent evidence  of  a

          subsequent modification of a  written contract.  See, e.g.,  R.I.
                                                           ___  ____

          Gen. Laws    6A-1-205, 6A-2-202.  Although the Agreement contains

          a provision barring nonwritten modifications,  see Agreement Art.
                                                         ___

          26, the PMPA specifically  provides that franchise agreements may

          be written  or oral.  See  15 U.S.C.   2801(10),  2801(1)(A), (B)
                      __ ____   ___

          (defining "franchise"  as "contract");  see also Royer  v. Royer,
                                                  ___ ____ _____     _____

          501  A.2d  739, 741  (R.I. 1985)  ("[A]  written contract  may be

          modified by subsequent oral agreement of the parties," even where

          contract expressly requires written modification only.); J. Koury
                                                                   ________

          Steel Erectors, Inc. v. San-Vel Concrete Corp., 387 A.2d 694, 697
          ____________________    ______________________

          (R.I.  1979) (describing  implied-in-fact contracts  arising from

          course of dealing).  

                                          8

                    What  is  more  important,  the  PMPA's  definition  of

          "contract"  expressly  provides  that,  "[f]or  supply  purposes,

          delivery  levels during the same month of the previous year shall

          be  prima facie evidence of an agreement to deliver such levels."

          15 U.S.C.   2801(10).  If the "short load" delivery levels became

          part of  a  modified  Shell-K.E.M.  franchise  contract,  Shell's

          abrupt  change of course might  constitute a breach  of the fran-

          chise agreement.   Thus  viewed, K.E.M.'s "equitable"  defense to

          section  2802(c)(10) might  be considered  at least  "colorable,"

          since K.E.M. might make a plausible argument that Congress  could

          not have intended  to permit franchisors to  resort to conclusive

          presumptions  of  "reasonableness"  under section  2802(c)  where

          their own breach of the franchise agreement afforded the means of
                                                                   _____

          securing a per se right of termination. 
                     ___ __

                    Given  the prominent  equitable mandate  in the  PMPA's

          legislative  history, as  well  as the  nebulous and  undeveloped

          factual  record,  we  cannot  conclude that  the  district  court

          manifestly  abused  its  discretion  in  deciding  that  "serious

          questions going  to the  merits  [of Shell's  claim and  K.E.M.'s

          defenses  offer] . .  . fair ground  for litigation."   Nor do we

          presume  to  determine the  relative  merits,  either of  Shell's

          claims or K.E.M.'s defenses. 

                    The preliminary injunction is  affirmed and the case is
                    ___ ___________ __________ __  ________ ___ ___ ____ __

          remanded to the district court for further proceedings.
          ________ __ ___ ________ _____ ___ _______ ___________

                                          9