Court Opinion

ID: 215433
Source: CourtListenerOpinion
Date Created: 2011-04-26 16:26:49+00
Date Added: 2024-06-11T17:28:24.339047
License: Public Domain

United States Court of Appeals
                        For the First Circuit

No. 09-2312

               LUIS ALFREDO SANTIAGO-SEPÚLVEDA, ET AL.,

                       Plaintiffs, Appellants,

                                  v.

         ESSO STANDARD OIL COMPANY (PUERTO RICO), INC.;
            TOTAL PETROLEUM PUERTO RICO CORPORATION,

                        Defendants, Appellees.

No. 09-2313

               ENID MARGARITA FONSECA-MARRERO, ET AL.,

                       Plaintiffs, Appellants,

                                 v.

     ESSO STANDARD OIL COMPANY (PUERTO RICO), INC., ET AL.,

                        Defendants, Appellees.
                         ____________________

No. 09-2330
                      HÉCTOR GIERBOLINI, ET AL.,

                       Plaintiffs, Appellants,

                                  v.

                  ESSO STANDARD OIL COMPANY, ET AL.,

                        Defendants, Appellees.
                         ____________________

          APPEALS FROM THE UNITED STATES DISTRICT COURT
                 FOR THE DISTRICT OF PUERTO RICO

              [Hon. Justo Arenas, U.S. Magistrate Judge]
                              Before

                   Torruella, Boudin and Lipez,
                         Circuit Judges.

     Juan H. Saavedra Castro with whom Manuel Correa Márquez, Xana
Connelly, Correa, Collazo & Herrero, P.S.C., Carlos E. Montañez and
Carlos E. Montañez Law Office were on brief for appellants.
     Mark A. Klapow with whom Howrey LLP, Angel E. Rotger Sabat and
Maymí, Rivera & Rotger, P.S.C. were on brief for appellee Esso
Standard Oil Company (Puerto Rico).
     Lee Sepulvado-Ramos with whom Lady Cumpiano, Albéniz Couret-
Fuentes and Sepulvado & Maldonado, PSC were on brief for appellee
Total Petroleum Puerto Rico Corporation.

                          April 26, 2011
               BOUDIN, Circuit Judge.         Plaintiffs, who operated gas

stations as franchisees of Esso Standard Oil Co. ("Esso") in Puerto

Rico, sued Esso for alleged violations of Title I of the Petroleum

Marketing Practices Act ("PMPA"), 15 U.S.C. §§ 2801-2807 (2006 &

Supp. III 2010).       The magistrate judge, who presided at trial with

the parties' consent, see 28 U.S.C. § 636(c)(1) (2006), denied

plaintiffs'       request   for   injunctive       relief   and   damages,    and

plaintiffs now appeal.         The facts are largely undisputed.

               Esso operated as a supplier of gasoline in Puerto Rico

for   over     one   hundred   years;   as    of   2008,    161   stations   sold

Esso-brand gasoline in Puerto Rico.            These stations were operated

by independent franchise dealers under agreements with Esso that

authorized them to sell Esso's gasoline under Esso's trademark.

The franchise term was three years or longer for most plaintiffs,

although some plaintiffs had one-year trial franchises.                 In many

cases, Esso also provided the stations.1

               In late 2006, Esso--having suffered losses in the market

for the five preceding years--began to consider leaving Puerto

Rico.       After months of deliberation and negotiations, Esso decided

in March 2008 to sell its operations and assets to Total Petroleum

Puerto Rico Corp. ("Total"), a gasoline refiner and distributor

        1
      About a third of the franchises owned their own land and
stations outright, while two-thirds leased their stations from Esso
as part of the franchise agreement. This latter group leased the
land and premises to Esso and Esso leased it back to them as part
of the franchise agreement.

                                        -3-
that at the time operated approximately ninety stations in Puerto

Rico.   On March 17, 2008, Esso notified its franchisees of its

planned withdrawal from the Puerto Rican market, the sale of its

assets to Total, and the termination of its relationship with its

franchisees, effective September 30, 2008.

            In late June and early July 2008, Total began to offer

Esso's franchisees contracts to serve as franchisees of Total.

Total uses a standard franchise model contract offered to potential

new franchisees and to existing franchisees whose contracts are

renewed.    The standard contract is periodically updated, and had

been updated in 2007 and 2008; Total offered the then-current

standard contract to Esso franchisees.

            In late August and early September 2008, five groups of

Esso franchisees, unhappy with the terms Total offered in its

franchise   agreements,   filed   separate   lawsuits   in   the   federal

district court in Puerto Rico against Esso.      The complaints sought

injunctive and declaratory relief under PMPA to prevent Esso from

terminating its contracts with plaintiffs, as well as damages for

Esso's alleged failure to comply with PMPA.      Esso then pushed back

the termination date of its contracts to the end of October 2008.

            The district court consolidated the lawsuits and referred

the cases to the chief magistrate judge, and the parties consented

to a bench trial before the magistrate judge.            Three days of

hearings were held and ultimately the magistrate judge issued three

                                  -4-
opinions.2     In the first, on October 18, 2008, he concluded that

Esso had complied with PMPA and denied plaintiffs' request for

injunctive relief.     Santiago-Sepúlveda I, 582 F. Supp. 2d at 185.

             All but two of the plaintiffs eventually agreed to accept

franchise agreements offered by Total.            In a second opinion, on

June 23, 2009, the magistrate judge reaffirmed that Esso's actions

had complied with PMPA, but, explaining that the question remained

whether   the    individual   contract    terms    in   Total's   franchise

agreement complied with PMPA, he proceeded to find three specific

terms illegal under local law but severable under the franchise

contract's severability clause.          Santiago-Sepúlveda II, 634 F.

Supp. 2d at 211-12.

             Finally, on reconsideration, the magistrate judge issued

his third opinion on July 30, 2009.       In it, he reaffirmed that the

terms found illegal in the previous opinion were severable and held

that two more terms were unenforceable under Puerto Rico law.

Santiago-Sepúlveda III, 638 F. Supp. 2d at 200, 204-05.                 He

thereafter entered a final judgment in favor of Esso and Total

(which had intervened to defend its franchise contract and its

acquisition of Esso's properties).

     2
      Santiago-Sepúlveda v. Esso Standard Oil Co. (P.R.) (Santiago-
Sepúlveda I), 582 F. Supp. 2d 154 (D.P.R. 2008), vacated in part,
No. 08-1950, 2009 WL 87586 (D.P.R. Jan. 12, 2009); Santiago-
Sepulveda v. Esso Standard Oil Co. (P.R.) (Santiago-Sepúlveda II),
634 F. Supp. 2d 201 (D.P.R. 2009); Santiago-Sepúlveda v. Esso
Standard Oil Co. (P.R.) (Santiago-Sepúlveda III), 638 F. Supp. 2d
193 (D.P.R. 2009).

                                   -5-
             Appeals, by several contingents of plaintiffs, followed.

We review factual findings made in the bench trial for clear error,

Monahan v. Romney, 625 F.3d 42, 46 (1st Cir. 2010); denials of an

injunction for abuse of discretion, García-Rubiera v. Calderón, 570
F.3d 443, 455-56 (1st Cir. 2009); and rulings on purely legal

issues de novo, id. at 456.    Because the framework for the judgment

under review is provided by PMPA, the first step is to outline the

relevant elements of the statute.

             PMPA is a conventional dealer-protection statute limiting

the circumstances in which a motor fuel franchisor can terminate or

choose not to renew a franchise relationship.         See Chestnut Hill

Gulf, Inc. v. Cumberland Farms, Inc., 940 F.2d 744, 746 (1st Cir.

1991).     This statute, like most others at both the federal and the

state level, rests on the perceived "disparity of bargaining power

between franchisor and franchisee," Veracka v. Shell Oil Co., 655
F.2d 445, 448 (1st Cir. 1981) (Breyer, J.), coupled with concerns

said to be peculiar to franchising, Draeger Oil Co. v. Uno-Ven Co.,

314 F.3d 299, 299 (7th Cir. 2002) (Posner, J.); see 123 Cong. Rec.

10,386 (1977) (statement of Rep. Mikva).

             Under PMPA, a franchisor may terminate the relationship

on   any    of   five   specified   grounds,   15   U.S.C.   §   2802(a),

(b)(2)(A)-(E), and the one pertinent here--subsection (E)--permits

termination if a franchisor determines

             in good faith and in the normal course of
             business to withdraw from the marketing of

                                    -6-
          motor fuel through retail outlets in the
          relevant geographic market area in which the
          marketing premises are located.

There are other restrictions and requirements, such as proper

advance notice, id. §§ 2802(b)(1)(A), 2804(b)(2), but they are not

at issue on this appeal.

          However, for withdrawals under subsection (E), there are

further conditions, 15 U.S.C. § 2802(b)(2)(E)(iii), specifying

alternative means to preserve the franchisee's operations; the

statutory alternative chosen by Esso here allowed it to sell the

premises it leased to its dealers to another franchisor, so long as

the purchasing franchisor-to-be

          offers, in good faith, a franchise to the
          franchisee on terms and conditions which are
          not discriminatory to the franchisee as
          compared to franchises then currently being
          offered by such other person or franchises
          then in effect and with respect to which such
          other person is the franchisor.

Id. § 2802(b)(2)(E)(iii)(II).     Whether this condition applies to

all of the dealers in this case is an open question but, given our

disposition, need not be resolved.3

     3
      The condition applies only to franchisees that occupy "leased
marketing premises," id. § 2802(b)(2)(E)(iii), and whether it
applies to those who own their premises but engaged in a double
lease arrangement (see note 1, above) is an open question. Compare
id. § 2801(1)(B)(i), 2801(9), with Barman v. Union Oil Co. of Cal.,
50 F. App'x 824, 829 (9th Cir. 2002) (unpublished). Further, by
its terms section 2802(b)(2)(E) is limited to franchise terms that
are three years or longer.

                                  -7-
            If a franchisor terminates the franchise relationship but

fails to comply with these requirements, its franchisees can sue it

for equitable relief, actual and exemplary damages, and attorney

and expert witness fees.        15 U.S.C. § 2805(a), (b), (d).         When the

fact of termination is proved by the franchisee (and it is conceded

here), the burden falls on the franchisor to establish "that such

termination or nonrenewal was permitted" by PMPA.              Id. § 2805(c).

            Plaintiffs' first substantive contention is that Esso did

not comply with section 2802(b)(2)(E)(iii)(II) because (allegedly)

Total did not offer the former Esso dealers "franchise[s] . . . on

terms and conditions which are not discriminatory to the franchisee

as compared to franchises then currently being offered by [Total]

or franchises then in effect and with respect to which [Total] is

the   franchisor."       15   U.S.C.    §    2802(b)(2)(E)(iii)(II).      In   a

nutshell,    plaintiffs       allege    on    appeal   that   different   Esso

franchisees were offered different contracts by Total.

            For example, plaintiffs say that Total required some to

operate a convenience store, while others were not required to do

so, and those operating convenience stores also had to sign non-

compete agreements, while others did not.              They also allege that

Total   included     a   term   in     the    franchise   agreement--personal

supervision by the franchisee--that would make those franchisees

that operate multiple stations in default (an interpretation that

Total's marketing director denied in his own testimony).

                                        -8-
            Although plaintiffs made a discrimination claim below, it

was different from those urged on appeal.              The argument made to the

magistrate judge was that the franchises offered to them were

different    than      the    ones    Total      offered     to     its    preexisting

franchisees, not that the terms offered to former Esso dealers

differed from each other.            Absent plain error, which was not even

asserted on this issue, a claim not presented in the lower court is

not available on appeal.           Bennett v. City of Holyoke, 362 F.3d 1,

6 (1st Cir. 2004); Beddall v. State St. Bank & Trust Co., 137 F.3d
12, 22 (1st Cir. 1998).

            As   it     happens,       "Congress      did         not     intend       'not

discriminatory' to mean that each service station operator must be

offered a franchise with identical terms.                   A franchisor must be

free to offer different terms at different franchise locations,

depending on the economic conditions and forecast for that area."

Ewing v. Amoco Oil Co., 823 F.2d 1432, 1438 (10th Cir. 1987).

Thus, to employ additional terms for franchisees with convenience

stores on the premises could well be legitimate so long as all of

Total's franchisees in this situation were offered similar terms.

But we need not pursue the subject.

            Plaintiffs'        next    claim     is   that    Total's          offer    of

franchises       was         not     "in      good    faith,"             as     section

2802(b)(2)(E)(iii)(II) requires, because the magistrate judge found

that some terms in the franchise contract violated state law and

                                           -9-
struck the offending provisions.                     This claim raises questions not

only     as    to        the     meaning        of     "good      faith"     in     section

2802(b)(2)(E)(iii)(II), but also the relationship between this

provision and other sections in PMPA that relate to the statute's

interaction with state law.                15 U.S.C. §§ 2805(f)(1)(B), 2806(a).

              "Good faith" usually refers to a subjective intent or

motive    that      is    legitimate        rather       than    consciously      evil   or

dishonest. Esso Standard Oil Co. (P.R.) v. Monroig-Zayas, 445 F.3d
13, 18 (1st Cir. 2006) (quoting Esso Standard Oil Co. v. Dep't of

Consumer Affairs, 793 F.2d 431, 432 (1st Cir. 1986)) (construing

section 2802(b)(3)(A)).             But just what must be done in good faith

by the new franchisor is less certain; and the phrase could be read

merely to afford some protection to the new franchisor in making an

offer that it honestly believed to be non-discriminatory.

              Indeed,          Congress    emphasized           that   the   good    faith

requirement aimed only to protect franchisees from "arbitrary or

discriminatory"          behavior,        but    otherwise        to   "avoid     judicial

scrutiny"     of    the        reasoning    behind       the     franchisor's     business

judgments.       S. Rep. No. 95-731, at 37 (1978), reprinted in 1978

U.S.C.C.A.N. 873, 896. But the requirement could as easily be read

instead,       or        as      well,      to        afford      further       franchisee

protection--pertinently, by disallowing an offer that might be non-

discriminatory but was structured to be unacceptable and intended

to provoke refusal.

                                            -10-
           A number of courts have construed the term in the latter

sense, and while the issue has not been adequately briefed, we will

assume for present purposes that such an offer would not be in good

faith.4   This might seem hard on the departing franchisor who alone

can be sued under PMPA and may have no easy way to judge the

subjective good faith of its successor; but the statute does aim to

keep the former franchisees in business and the sale of a business

involves various risks and there are various means for the seller

to protect against them.

           However, no evidence suggests that Total devised the

franchise agreements in the hope that they would be rejected.         The

magistrate   judge   found   several    provisions   of   the   franchise

agreement unlawful under Puerto Rico law; but Total, even assuming

it shared that view, could easily have believed that the agreements

would be accepted by franchisees, old and new.            The franchise

agreement was Total's standard model for renewing franchises for

its own dealers, and it was buying out Esso to expand its business.

     4
      See, e.g., Unocal Corp. v. Kaabipour, 177 F.3d 755, 767 (9th
Cir. 1999) (good faith requirement looks in part to whether terms
are used "'as a pretext to avoid renewal'" (quoting Valentine v.
Mobil Oil Corp., 789 F.2d 1388, 1392 (9th Cir. 1986))); May-Som
Gulf, Inc. v. Chevron U.S.A., Inc., 869 F.2d 917, 927 (6th Cir.
1989) (incoming franchisor found to act in good faith where its
actions demonstrated that it was "committed to timely renewal of
the plaintiffs'" contracts, and there was no evidence that it,
among other things, "drastically increased [the plaintiffs']
rents").

                                 -11-
               Indeed, the magistrate judge found no evidence indicating

that "the Total franchise agreements [were intended] to force any

franchisee to reject the proposal."        Santiago-Sepúlveda I, 582 F.

Supp. 2d at 182.       And when the magistrate judge said that certain

provisions were unenforceable and struck them, Total went along

with the court and has not cross appealed.       So we see no basis for

suggesting that Total intended that its offer be rejected, and

plaintiffs point to nothing that would support such an inference.

               Instead, plaintiffs argue that any term violating state

law       in   any   respect   comprises   a   violation   of   section

2802(b)(2)(E)(iii)(II). For this position they rely on a statement

in a House Report that if

               a franchisor proposed a provision in a
               franchise agreement at the time of renewal
               which    was    expressly    prohibited   or
               unenforceable under State law, such change
               could not be considered to have been made in
               "good   faith"   within    the   meaning  of
               102(b)(3)(A) [15 U.S.C. § 2802(b)(3)(A)].

H.R. Rep. No. 103-737, at 5 (1994), reprinted in 1994 U.S.C.C.A.N.

2779, 2782-83.

               This looks impressive until one learns that this language

was addressed to (a) a proposed provision that was not adopted;5

(b) an example discussing renewals under section 2802(b)(3)(A), and

      5
      Compare H.R. Rep. No. 103-737, at 10 (1994), reprinted in
1994 U.S.C.C.A.N. at 2785, with 15 U.S.C. § 2806(a), and Petroleum
Marketing Practices Act Amendments of 1994, Pub. L. No. 103-371,
108 Stat. 3484, 3485-86 (1994).

                                    -12-
not to the incoming franchisor's duty to make a "good faith" offer

of nondiscriminatory contracts to franchisees, H.R. Rep. No. 103-

737, at 5 (1994), reprinted in 1994 U.S.C.C.A.N. at 2782; and (c)

a specialized problem regarding preemption for which a different

solution was found, id. at 4-5, reprinted in 1994 U.S.C.C.A.N. at

2782; 140 Cong. Rec. 27,316 (1994) (statement of Rep. Sharp).

            Plaintiffs' per se rule would put at risk a vast number

of market withdrawals. Franchising contracts commonly cover a wide

range of subjects, including clauses "pertaining to nearly every

detail    of   operation"   of   the   franchised        business.    Hadfield,

Problematic    Relations:   Franchising     and    the    Law   of   Incomplete

Contracts, 42 Stan. L. Rev. 927, 943 (1990).               Total's franchise

agreement, comprising interrelated contracts spanning about one

hundred    pages,   included     hundreds   of     clauses--of       which   the

magistrate judge invalidated in part just five.

            Congress did make clear that, save where PMPA regulates

termination and renewal and so bars inconsistent state law, state

law is not superceded, 15 U.S.C. § 2806(a), and it provided that a

franchisor could not require as a condition of entering into or

renewing a franchise a "release or waive[r]" of a federal right or

"any right that the franchisee may have under any valid and

applicable State law," id. § 2805(f).            But the primary effect of

these reservations is to leave franchisees free to bring private

                                    -13-
suits in state court to invalidate franchise provisions that are

inconsistent with state law.

              As the Supreme Court recently explained:

              In enacting the PMPA, Congress did not
              regulate every aspect of the petroleum
              franchise relationship but instead federalized
              only the two parts of that relationship with
              which it was most concerned: the circumstances
              in which franchisors may terminate a franchise
              or decline to renew a franchise relationship.
              Congress left undisturbed state-law regulation
              of other types of disputes between petroleum
              franchisors and franchisees.

Mac's Shell Serv., Inc. v. Shell Oil Prods. Co., 130 S. Ct. 1251,

1259 (2010) (citations omitted).               Nothing in PMPA purports to

create    a    separate   federal   cause      of   action    to   remedy     such

violations;      the   civil   remedy    provisions   of     section   2805    are

explicitly limited to violations of three other specified sections

including section 2802.         15 U.S.C. § 2805(a), (b), (d); Dersch

Energies, Inc. v. Shell Oil Co., 314 F.3d 846, 857 (7th Cir. 2002).

              This does not fully answer the question whether a state

law violation could ever serve to defeat a good faith offer under

section       2802(b)(2)(E)(iii)(II);      but it suggests that the "good

faith" test is not failed merely because a couple of terms in a

complex contract are at odds with state contract or franchise law,

itself often no model of clarity.6             Violations so harmful to the

     6
      Mac's Shell pointed out that construing the PMPA to cover
"'run-of-the-mill' franchise disputes" would have "serious
implications" and, because PMPA requires attorney and expert
witness fees and permits punitive damages,"turn everyday contract
disputes into high-stakes affairs." 130 S. Ct. at 1260 n.7.

                                        -14-
core franchise bargain as to invite rejection might be evidence of

an intent to cause rejection; but nothing like that is present

here.

           Plaintiffs next argue that the entire franchise contract

is invalid under state law, and so Total never in fact made an

"offer[]" of "a franchise to the franchisee[s]" under section

2802(b)(2)(E)(iii)(II).      The   underlying   argument   is   that   the

contract could not be saved by deleting specific clauses because

those provisions were not severable from the contract and so the

entire contract is invalid.        However, the contracts include a

"Severance of Clauses" provision that reads in pertinent part as

follows:

           [S]hould any provision in this Contract be
           found    to   be    unlawful,   invalid,    or
           unenforceable under present or future laws,
           said provisions shall be nullified; this
           Contract shall be interpreted and governed as
           if said unlawful, invalid or unenforceable
           provision had never been a part thereof, and
           the rest of the provisions in this Contract
           shall remain in force and will not be affected
           by the unlawful, invalid or unenforceable
           provision or its elimination.

           The franchise agreements are largely governed by Puerto

Rico law and such severance is permissible under Puerto Rico law.

E.g., McCrillis v. Autoridad de las Navieras de P.R., 23 P.R.

Offic. Trans. 109, 132-33 (P.R. 1989) ("[T]he parties, by mutual

agreement, stipulated the partial conservation of the contract.

There is no protected social interest that bars this solution."

(footnote omitted)).      Nor, as plaintiffs' mistakenly claim, is

                                   -15-
severance equivalent to "reformation," 27 R. Lord, Williston on

Contracts § 70:19 (4th ed. 2003), so the conditions for reformation

are beside the point.

              Plaintiffs also say that any terms inconsistent with

Puerto Rico law amount to a required waiver or release of state law

rights forbidden by section 2805(f)(1) and that, as they have not

been paid separately for such a waiver or release, the contract

fails for want of consideration.          Congress was apparently willing

to allow such waivers or releases if compensated, H.R. Rep. No.

103-737, at 6 (1994), reprinted in 1994 U.S.C.C.A.N. at 2782; S.

Rep. No. 103-387, at 4 (1994), but the terms found invalid were

voided   by    the   magistrate   judge    and   so   could   hardly   justify

compensation.

              As the last of their substantive claims, plaintiffs say

that the magistrate judge should have invalidated, under 15 U.S.C.

§ 2805(f)(1), still other provisions of the contract as violations

of   state    law--for   example,   a    non-compete    clause   relating   to

convenience store operations.           No request for their invalidation

was made until plaintiffs' reply brief and so they are barred on

this appeal,     Rivera-Muriente v. Agosto-Alicea, 959 F.2d 349, 354

(1st Cir. 1992), but plaintiffs may pursue whatever remedies they

retain under state law.

              Plaintiffs also make a single procedural claim, namely,

that the magistrate judge misstated the burden of proof at several

                                    -16-
points in his decision.     The statute, as already noted, says that

the plaintiff must show termination and the defendant must then

show that the conditions permitting termination were met.               15

U.S.C. § 2805(c).      The magistrate judge's statements are arguably

inconsistent with one another, recognizing at one point that the

burden was on the defendant and at other points suggesting that

plaintiffs had failed to offer evidence on specific issues.

            Confusion can easily occur because a defendant often

cannot know what the objection is until one is identified by the

plaintiff, and a lack of evidence from the party not bearing the

burden of proof can bear on whether there is an issue to be

resolved.    In all events, the preserved arguments that we have

considered do not turn on who bears the burden of proof, and there

is no indication that the magistrate judge's statements affected

the outcome.    See In re LaFata, 483 F.3d 13, 23 (1st Cir. 2007).

            Finally,   plaintiffs   seek   damages   and   attorney   fees.

Under 15 U.S.C. § 2805(d)(1), these are allowed to plaintiffs who

prove a violation of sections 2802, 2803 or 2807, but, as we

explained above, plaintiffs failed to prove any such violation.

Although the magistrate judge sided with plaintiffs on their

section 2805(f) claims, PMPA--which provides no express remedies to

plaintiffs for such violations, id. § 2805(a), (d)--assuredly does

not provide damages or fees for state law violations standing

                                    -17-
alone, so the magistrate judge correctly refused to award damages

or fees.

           The judgment of the court below is affirmed.   Each side

will bear its own costs on this appeal.

           It is so ordered.

                               -18-