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Westfield Centre Service Inc. v. Cities Service Oil Co.

Decided: March 6, 1978.


Ackerman, J.s.c.


This case requires the court, among other things, to construe the New Jersey Franchise Practices Act, N.J.S.A. 56:10-1 et seq. , and to rule on the act's constitutionality. After a plenary hearing I find the facts as follows:

Plaintiff James L. Galligan purchased the Cities Service franchise at 131-145 Elm Street, Westfield, New Jersey, in April 1973. The franchise was a so-called "traditional gasoline

station," providing gasoline and repairs as well as tires, batteries and accessories ("TBAs"). Galligan purchased the franchise for $35,000 from one Raymond Ditzel through plaintiff corporation Westfield Centre Service, Inc. (Westfield), of which Galligan was the sole officer, director and shareholder. Galligan had previously worked part-time at the station for 20 years. The $35,000 purchase price included $8,000 for goodwill

The property on which the franchise was located was owned by defendant Cities Service. Plaintiff was therefore both a franchisee and a lessee.

Galligan originally sought a two-year lease from defendant's then territory supervisor, one Raymond Katalenas. Katalenas told Galligan that only one-year leases could be granted, and further informed him that Cities Service would not permit any changes in the lease whatsoever. Galligan and Katalenas both testified, however, that Katalenas assured Galligan that as long as he did a good job and sold the product for the company, he would never have any trouble. Katalenas further testified that Galligan was expected to sell between 22,000 and 32,000 gallons of gasoline a month. The lease was signed on April 17, 1973 for a one-year term from May 1, 1973 to April 30, 1974. The lease was automatically renewed in April 1974, at which time Galligan formally assigned all his rights under the lease agreement to Westfield, with Galligan remaining personally liable for the corporation's debts to defendant.

I further find that Katalenas informed Galligan sometime in 1974 that defendant intended to sell the station and therefore would not renew the lease in 1975. Galligan told Katalenas about the $35,000 that he had paid for the business, and Katalenas relayed this information to his superiors; as a result, defendant agreed to renew the lease for one more year. The 1975 lease differed from previous leases in that it included a rider which provided in part:

If the station premises covered by this lease are sold by lessor, or if lessor shall elect to remove and/or reconstruct substantially all

the buildings and improvements now located on the station premises in accordance with plans it has developed therefor, then in any such event, lessor shall have the option to terminate this lease upon thirty (30) days prior written notice of such determination delivered to lessee.

On June 25, 1975 defendant sent Westfield a letter stating that defendant intended to sell the station for $259,000 and that if Westfield desired to purchase the station for that price, it should notify defendant within 30 days. Plaintiffs' attorneys responded in a letter dated July 10, 1975, objecting to the proposed sale and demanding that if defendant intended to sell the premises, plaintiffs should be relocated to another franchised service station. Defendants did not offer plaintiffs a new leasehold facility, but instead offered only stations for sale. Plaintiffs then demanded that defendant buy them out, reimbursing Galligan for his investment in both time and money. Defendant refused to do so, offering only to refund Galligan's security deposit and to buy back the gasoline which Westfield then had on hand. On January 22, 1976 defendant notified plaintiffs that the 1975 agreement would not be renewed and would be allowed to terminate on April 30, 1976. Plaintiffs commenced suit in this court on April 13, 1976 to restrain termination of the lease and to continue Westfield's tenancy under the same terms as prior to the 1975 lease and rider. Defendant represented to this court at that time that it would voluntarily refrain from terminating the tenancy or ceasing to supply Westfield with products until the return date of the order to show cause for preliminary restraints on May 3, 1976.

On April 23, 1976 defendant sought to remove this litigation to the Federal District Court on diversity grounds. Plaintiffs filed an acknowledgment of service of such petition for removal on April 28, 1976 and obtained a temporary restraining order from the Federal District Court on that date. The matter was set down for preliminary hearing on May 24, 1976 by Judge Lacey. On May 24 he granted defendant's

motion for summary judgment based on plaintiffs' erroneous pleading of the 1973 lease, which lease had since expired and been replaced by the 1975 extension. Judge Lacey further stated that the case involved a matter of first impression under the New Jersey Franchise Practices Act, and that the matter was more appropriately heard in the state court. The complaint was therefore dismissed without prejudice.

Plaintiff filed an amended complaint based on the 1975 lease in this court on May 26, 1976. On June 18, 1976 this court granted an interlocutory injunction enjoining defendant from terminating the tenancy of Westfield. The court further directed defendant to remove a "For Sale" sign which it had placed on the premises in question; the evidence was that the sign was posted for a total period of less than two hours.

The evidence also indicated that Westfield suffered a severe decline in sales beginning sometime in 1975. Specifically, the station sold on the average of between 27,405 and 30,390 gallons of gasoline a month during the period from 1965 through 1972 under Ditzel's management. In 1973, the first year of operation by Galligan, the station sold 348,512 gallons, or 29,042 gallons a month. In 1974 the station sold 366,638 gallons, or 30,553 gallons a month. In 1975, however, sales declined to a total of 259,927 gallons, or 21,661 gallons a month. Sales further declined in 1976 to 165,199 gallons, or 13,767 a month, and only 10,930 gallons a month for the first seven months of 1977. Westfield went out of business on July 31, 1977, and the interlocutory injunction of this court was accordingly dissolved shortly thereafter.

Defendant, for the most part, did not seriously dispute any of the factual contentions thus far enumerated. Defendant instead relied largely on the testimony of Norman D. Potter, general sales manager of the retail sales division of Cities Service since July 1, 1976, and previously regional sales manager for the area encompassing Long Island, New York

City, New Jersey, Pennsylvania, Delaware, Maryland, Northern Virginia, the District of Columbia and part of West Virginia (hereinafter designated as the Philadelphia region). Potter's testimony to a large extent focused on how the decision to sell the station in question was reached and how that decision fit into defendant's overall marketing strategy. This testimony was corroborated and enlarged upon by the testimony of Robert Moore, currently Vice President of Public Affairs for defendant and previously Vice President of Marketing, in a deposition admitted into evidence. I found Potter to be an honest and impressive witness. Based largely on his testimony, as well as certain testimony by other witnesses and certain documents in evidence, I find the following events to have occurred.

At the end of World War II the country found itself with many refineries originally built to satisfy wartime needs. There was at the same time a tremendous consumer demand for new automobiles. As a result, the oil industry began in the late 1940s to construct a large number of service stations. This trend continued through the 1950s and 1960s, and to some extent into the 1970s.

As time went on, however, several new forces had entered the marketplace. Most significant were the so-called independents, who offered low price and even self-service, and eventually increased their share of the national market to 30%. In New Jersey, for example, the major companies received competition from such independent marketers as Hess, Crown, Digas, Powertest and Merit. In addition, entities such as Korvette and K-Mart began to compete with gasoline retailers in the areas of TBA's and mechanical services. Competition was also experienced from various specialty shops offering tune-ups, muffler repair and so forth. A severe price war between 1970 and 1972 further weakened defendant's position.

In 1972 Cities Service had less than 2% of the nationwide market and less than 1% of all service stations. In New Jersey Cities Service had approximately 4% of the

market in 1972; that figure is now under 2%. Based on these figures, Potter contended, and I agree, that Cities Service should really be classified as a large independent rather than a major.

Cities Service began to analyze its position in 1972 and concluded that it was overinvested in real estate. Particular problems were created by the freezing of rents by the Economic Stabilization Act of 1970 and 1971, and by an Environmental Protection Agency requirement that each individual station be equipped with a two-stage vapor recovery device to reduce air pollution. Based on these findings Moore decided in 1972 that a program based on new acquisitions was self-destructive, and that different concepts should be tested.

In late 1972 a pilot program was instituted in Richmond, Virginia. Moore testified in his deposition that a major part of the new marketing strategy was the reduction of costs through a decrease in station density. The decision was made to close a number of stations and sell the property. The strategy also involved the conversion of a number of traditional-style stations to stations selling only gasoline at lower prices, accompanied by Cities Service-owned "Quik-Marts," convenience stores selling milk, cigarettes and certain grocery items, where studies showed this to be appropriate. Similar programs were subsequently introduced in a number of locations, including Fort Wayne, Indiana; Chicago; Long Island; Atlanta and Dade County, Florida.

Plans for New Jersey were made beginning in June 1973, and in August 1974 Potter was advised as regional manager to investigate New Jersey's retail operations. Potter was asked (1) to prepare a list of all service stations owned or leased; (2) to gather information as to each station's historical performance, and (3) to set up an evaluation committee. The committee, which included a real estate man and an economic planning representative, made two one-week trips in late 1974 to evaluate each station based on its rate of return. Stations were then designated as keep,

keep-dispose or dispose. The second category consisted of stations for which an alternate mode of operation was to be tried before a final decision was made.

Galligan's station was unanimously placed on the dispose list in September 1974. The final decision as to New Jersey stations was made in February 1975. Each territorial manager was then given a booklet, a copy of which was entered into evidence, describing the fate of each station. Potter testified that Galligan's station was adjudged to be in a poor location and of little potential; it is undisputed that there was no animus toward Galligan personally.

Katalenas testified to a remark allegedly made by one Louis Christodolou, one of the individuals in charge of implementing the marketing plan in the Philadelphia region from 1973 on, around the time that he distributed the disposition booklets to the salesmen, including Katalenas in late 1974. Christodolou allegedly said that "anything short of murder" could be used to implement the plan. Defendant strongly denied that such a statement was made, and pointed to a suit instituted by Katalenas against Cities Service arising out of a 1976 incident in which Katalenas was discharged for allegedly forcing a franchisee to sign an illegal mutual cancellation agreement.

The court fully realizes that the 1976 discharge and lawsuit are evidence of possible bias on the part of Katalenas. Nevertheless, after carefully evaluating the testimony and demeanor of both Katalenas and Christodolou on the stand, the court is inclined to accept as true Katalenas' representation that the statement attributed to Christodolou was in fact made. For reasons to be stated later, however, the statement by Christodolou is irrelevant to the disposition of this case.

It is undisputed that the program embarked upon by defendant was a financial success. In 1972 defendant owned 2400 stations, of which 2200 were lessee facilities. By 1977 defendant owned only 530 stations, of which at most 230 were lessee facilities. The total sales of defendant during

this period declined from 75 to 80 million gallons of gasoline a month in 1972 to 50 million gallons a month in 1977. Thus, defendant cut the cost of operation of owned stations by roughly 78% while decreasing sales by at most 37.5%. Defendant's profits have correspondingly increased and its financial position has been considerably strengthened.*fn1

At the end of plaintiffs' case defendant moved to dismiss pursuant to R. 4:37-2(b). Applying the required standard of construction of all evidence in the light most favorable to plaintiffs, the court made two findings of fact: (1) that there was no showing of any causal relationship between the acts of defendant and plaintiffs' going out of business, and (2) that Galligan had recouped all of his original investment when this suit was commenced. The court therefore dismissed plaintiffs' demands for injunctive relief and compensatory damages, and also dismissed those counts of the complaint sounding in unjust enrichment. The only issues now left in the case are attorney's fees and punitive damages. Resolution of these issues requires the consideration of certain questions of statutory construction and constitutional law.

I. Attorney's Fees

A. Statutory Basis

R. 4:42-9(a) provides in part that "No fee for legal services shall be allowed in the taxed costs or otherwise, except * * * (8) In all cases where counsel fees are permitted by statute." The statutory basis for counsel fees in the instant case is provided by N.J.S.A. 56:10-10:

Any franchisee may bring an action against its franchisor for violation of this act in the Superior Court of the State of New Jersey to recover damages sustained by reason of any violation of this act

and, where appropriate, shall be entitled to injunctive relief. Such franchisee, if successful, shall also be entitled to the costs of the action including but not limited to reasonable attorney's fees.

As noted, defendant originally intended to terminate Westfield's lease within 30 days of June 25, 1975. Only through the intervention of plaintiffs' counsel, both in seeking a settlement and ultimately in obtaining preliminary injunctive relief, was the station kept in business through July 31, 1977. Although plaintiffs went out of business on that date without help from defendant, this fact should not operate to deprive plaintiffs of the counsel fees amassed in staving off defendant's attempted termination of the lease at an earlier date.

Nor should counsel fees be limited solely to the period ending July 31, 1977. Defendant did not at that point offer to pay plaintiffs' litigation expenses. The continuation of the litigation was therefore necessary in order to establish plaintiffs' right to said counsel fees.

Plaintiffs' right to counsel fees, however, is predicated on a finding by this court that the acts attempted by defendant would in fact have violated the Franchise Practices Act. The court could not in fairness or equity require defendant to pay the counsel fees incurred in enjoining it from doing an act which would have been legal. I therefore turn to the threshold question of whether the termination of a franchise because the franchisor wishes for bona fide business reasons to dispose of the property is a violation of the Franchise Practices Act.

B. The Franchise Practices Act

1. Literal Terms

N.J.S.A. 56:10-3(a) defines "franchise" as:

N.J.S.A. 56:10-3(c) defines a "franchisor" as "a person who grants a franchise to another person," and N.J.S.A. 56:10-3(d) defines a "franchisee" as "a person to whom a franchise is offered or granted." The parties do not dispute that a franchise relationship existed between Westfield and Cities Service, and I so find.

Defendant is specifically charged with having violated N.J.S.A. 56:10-5, which provides:

It shall be a violation of this act for any franchisor directly or indirectly through any officer, agent, or employee to terminate, cancel, or fail to renew a franchise without having first given written notice setting forth all the reasons for such termination, cancellation, or intent not to renew to the franchisee at least 60 days in advance of such termination, cancellation, or failure to renew, except (1) where the alleged grounds are voluntary abandonment by the franchisee of the franchise relationship in which event the aforementioned written notice may be given 15 days in advance of such termination, cancellation, or failure to renew; and (2) where the alleged grounds are the conviction of the franchisee in a court of competent jurisdiction of an indictable offense directly related to the business conducted pursuant to the franchise in which event the aforementioned termination, cancellation or failure to renew may be effective immediately upon the delivery and receipt of written notice of same at any time following the aforementioned conviction. It shall be a violation of this act for a franchisor to terminate, cancel or fail ...

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