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May 28, 1982

Charles A. MEYER, Plaintiff,

The opinion of the court was delivered by: DEBEVOISE

Plaintiff, Charles A. Meyer, instituted this action against Amerada Hess Corporation seeking injunctive and declaratory relief and damages on account of a new gasoline station Dealer Agreement which Hess required that he execute in August, 1981. The First Count of the complaint seeks relief under the Petroleum Marketing Practices Act of 1978, 15 U.S.C. § 2801 et seq. (the "PMPA"). The Second Count seeks relief under the New Jersey Franchise Practices Act, N.J.S.A. 56:10-1 et seq. The Third and Fourth Counts allege state common law claims.

Plaintiff applied for a preliminary injunction enjoining Hess from enforcing the rent obligation of the new Dealer Agreement and requiring Hess to continue its franchise relationship with him under the terms of prior agreements between the parties. Hess has moved for summary judgment on alternative grounds. First, Hess asserts that there is no federal jurisdiction under the Act since there has been neither a non-renewal nor termination of plaintiff's franchise relationship, a prerequisite for a federal claim. It would follow, Hess argues, that since there is no federal claim there is no basis for the exercise of pendent jurisdiction over the state law claims. Second, assuming the Act is applicable, Hess argues that on the basis of the undisputed facts it is not liable as a matter of law under either federal law or state law.

 A hearing was held and this constitutes my findings of fact and conclusions of law.

 Findings of Fact

 Hess, a refiner and marketer of petroleum products, sells gasoline at retail at "gasoline only" stations under the brand name "Hess". It operates through lessee-dealers who lease their station properties from Hess and purchase gasoline from it, and through company-operated stations which are operated by managers and attendants employed by Hess. In December, 1968 plaintiff became a lessee-dealer at Hess station # 30270, located at Main Street and Willow Grove Avenue in Hackettstown, New Jersey. He had previously been a lessee-dealer at a Hess station in Jersey City. He operated from 1968 until December 1, 1981 (the effective date of the new Dealer Agreement at issue in this case) pursuant to a Dealer Lease dated December 20, 1968 and a Dealer Franchise and Sales Agreement dated December 19, 1968. Since December 1, 1981 plaintiff has operated under the new Agreement, which he signed on August 21, 1981. The circumstances of his signing that agreement will be described below.

 Hess owns the underlying land for approximately 55% of the lessee-dealer stations, and controls it under long-term leases with third parties for approximately 45% of those stations. All of the real estate expenses relating to the properties are borne by Hess. Thus, Hess is responsible for all property taxes on the lessee-dealer stations and Hess bears the rental on the ground leases of those properties which it controls under long-term leases. None of the lessee-dealers has made any capital investment in the station properties. However, each devotes his time, energy, talents and resources to developing customers and good will at the location where he conducts his business. This good will has value and may command a significant price if a lessee-dealer transfers his franchise. Hess owns the capital improvements and bears the cost of constructing the service station building and of purchasing and installing the improvements located thereon, including the pumps and dispensers, tanks, plumbing, lighting, and the pavement. Hess maintains the stations. The lessee-dealers' principal expenses are the operating costs of the station (employee compensation, some light maintenance such as light bulbs, painting, landscaping, paper supplies, etc.) and the rental paid to Hess. They must, of course, pay for the gasoline which they sell.

 Historically, the rent paid by Hess' lessee-dealers was determined by the volume of gasoline which Hess sold to the station. Commencing in the late 1960's until mid-1976, the rental formula was as follows: 1 cent per gallon from 0 to 60,000; 11/2 cents per gallon from 60,000 to 150,000; 13/4 cents from 150,000 to 200,000 gallons; and 2 cents per gallon over 200,000. In mid-1976 Hess modified this formula through an optional rent program whereunder the per gallonage formula was reduced to 1 cent per gallon up to 200,000 and 11/2 cents per gallon over 200,000, and a minimum rental was instituted to protect Hess against dealers whose sales fell significantly below what Hess considered the potential of their stations. The mid-1976 rent program was optional, the dealers being free to accept or reject the new formula. If they rejected it they remained under the pre-existing ascending gallonage formula, as plaintiff elected to do.

 As Hess' economist, Dr. Marcus, noted, the cents per gallon formula for establishing rent was popular among both oil companies and dealers generally until the late 1970's. It had the virtue of administrative simplicity and it appeared to gear rents to a dealer's ability to pay. However, as Dr. Marcus pointed out, there were at least two undesirable economic effects of utilization of this formula. First, particularly in recent years when the value of service stations and the cost of capital increased, high gallonage dealers were, in effect, subsidizing low gallonage dealers. This often resulted in the high gallonage dealer having a lower margin (because of the cents per gallon rent escalation) and being less able to pay. Second, the cents per gallon system introduced a distorting factor into pricing decisions of individual dealers.

 Recent economic changes made the cents per gallon formulas undesirable from the perspective of the oil companies. As mentioned above, after 1970 the market value of dealer facilities increased and the cost of capital also increased dramatically. For example, if in 1970 a facility had a value of $ 100,000 and the cost of capital was 8%, a reasonable return might be $ 8,000 a year. If the value of the same facility were $ 300,000 in 1981 and the cost of capital were 15% in that year, a reasonable return would be in the neighborhood of $ 45,000 a year. In fact, however, by reason of the decline in gasoline sales and application of the cents per gallon rent formulas, the oil companies' return on their dealer facilities in the form of rent declined as their value and the cost of capital increased.

 During the period when the oil companies devised and implemented the cents per gallon formulas, they were less concerned with the economics of individual stations. Their primary concern was the sale of large quantities of gasoline and the profits to be derived from such sales. Now, however, under very different economic conditions, they have become concerned with individual gasoline station economics. Hess' actions which precipitated this action reflect that concern.

 Commencing with the Arab oil embargo in the fall of 1973, the price of crude oil and thus the price of gasoline rose dramatically, and gasoline consumption declined. This had the effect of causing Hess' aggregate rental income, linked as it was to the amount of gasoline purchased by the lessee-dealers, to decline some 56% from a high of $ 7.1 million in 1973 to just over $ 3 million in 1980.

 The monthly rents which plaintiff paid reflect this over-all trend: 1970-$2,400 1976-$1,309 1971-$3,072 1977- $1,574 1972-$3,649 1978-$1,716 1973-$2,500 1979-$1,775 1974-$1,973 1980-$1,259 1975-$1,736 1981-$1,359


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