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Patel v. Sun Co.

April 10, 1998

PRAKASH H. PATEL; SHOBHA P. PATEL, H/W APPELLANTS
v.
SUN COMPANY, INC.; LANCASTER ASSOCIATES



On Appeal From the United States District Court For the Eastern District of Pennsylvania (D.C. Civ. No. 94-cv-04318) Argued: September 15, 1997

Before: Becker, Chief Judge, Sloviter and Scirica, Circuit Judges.

The opinion of the court was delivered by: BECKER,*fn1 Chief Circuit Judge.

(Filed April 10, 1998)

OPINION OF THE COURT

Plaintiffs Prakash H. Patel and Shobha P. Patel appeal from an order of the district court granting summary judgment in favor of defendant Sun Company, Inc. ("Sun") in a case brought under the Petroleum Marketing Practices Act, 15 U.S.C. § 2801 et seq. ("PMPA" or "Act"). This litigation has been ongoing since 1988, and the case has been here before, see Patel v. Sun Co., Inc., 63 F.3d 248, 252 (3d Cir. 1995) ("Patel V"). The gravamen of the Patels' complaint, then and now, is that Sun has made an "end run" around a provision of the PMPA that requires service station franchisors like Sun to make bona fide offers to their franchisees before selling the service station premises to a third party. See § 2802(b)(3)(D)(iii)(I). In 1987, Sun sold the land upon which the Patels had operated their service station for twenty-two years to an unrelated third party, Lancaster Associates ("Lancaster"), without first offering it to them. Sun claims that it was not required to make a bona fide offer to the Patels because it did not terminate their franchise when it sold the property. Instead, Sun took a six year leaseback from Lancaster and did not disturb the Patels' franchise until that lease expired in 1994. Sun contends that six years later it could rely on the "expiration of an underlying lease" provision of the PMPA, see § 2802(c)(4), which allows franchisors to terminate or non-renew franchises without first making a bona fide offer to their franchisees when the leases underlying the franchise expire.

The Patels offer four alternative theories under which they claim that Sun should be liable for damages for selling the premises to Lancaster without first making a bona fide offer, despite the leaseback arrangement. First, they argue that because the Lancaster-Sun lease was created after the inception of the first franchise agreement between Sun and the Patels, it does not qualify as an "underlying lease" for the purposes of § 2802(c)(4). Therefore, according to the Patels, Sun cannot rely on § 2802(c)(4) to skirt the bona fide offer requirement in § 2802(b)(3)(D)(iii)(I). Second, they contend that, even if the Lancaster-Sun lease technically fits the § 2802(c)(4) definition of an underlying lease, Sun should not be permitted to circumvent the bona fide offer requirements simply by delaying the eventual nonrenewal date through the use of a leaseback. To the extent that the text of the PMPA seems to allow that result, the Patels urge us to close that "unintended loophole" by reading a "sale-leaseback offer requirement" into the Act. Third, the Patels submit that we must inquire into the objective reasonableness of Sun's business decision to avoid the bona fide offer provision by creating the leaseback with Lancaster. Fourth, the Patels assert that, at the very least, Sun's decision to create the leaseback must have been made subjectively "in good faith and in the normal course of business" and not simply to avoid the bona fide offer requirement.

Unfortunately for the Patels, none of their arguments carry the day. Under a plain reading of the unambiguous text of the Act, we find that the definition of "underlying lease" in § 2802(c)(4) is clear, and that it includes leases, like the Lancaster-Sun leaseback, created during the business relationship between the franchisor and franchisee. Additionally, we can find no statutory basis to justify reading into the PMPA new provisions like a "sale leaseback offer requirement" that have no grounding in the Act's text or legislative history. Moreover, our decision in Lugar v. Texaco, Inc., 755 F.2d 53 (3d Cir. 1985), precludes the imposition of an objective reasonableness inquiry into franchisor decisions to terminate or non-renew franchises based on the underlying lease exception in § 2802(c)(4). Finally, while we agree with the Patels that under Slatky v. Amoco Oil Co., 830 F.2d 476 (3d Cir. 1987) (en banc), courts must engage in a subjective "in good faith and in the normal course of business" review of franchisor decisions to terminate or non-renew the franchise when an underlying lease expires, we cannot reverse on this ground. This is because we are bound under the doctrine of law of the case by the judgment in Patel V, which found that Sun acted in good faith when it did not renew the Patels' franchise. For all these reasons, the judgment of the district court will be affirmed.

I.

Sun owned a parcel of land in Wayne, Pennsylvania, that contained a commercial office building, a large parking area, and other improvements. Sun leased a small portion of this property to the Patels, who operated a Sunoco service station there for twenty two years pursuant to a series of franchise agreements with Sun. The first post-PMPA agreement between Sun and the Patels began on August 21, 1978.

In December of 1987, Sun sold the entire undivided parcel, which included the Patels' service station on one corner, to Lancaster Associates, an unrelated third party developer. It is not clear from the record whether Sun first offered the property to the Patels, and so for the purposes of summary judgment review we must assume that Sun did not. Lancaster agreed to lease the service station portion of the parcel back to Sun until September 30, 1994. The Lancaster-Sun leaseback did not, however, contain any specific renewal provisions or options granting Sun the right to re-purchase the property.

Sun, upon entering into the leaseback with Lancaster, and as part of their 1988 Franchise Agreement, immediately subleased the service station premises to the Patels for a term of three years. The sublease provided that Sun's right to grant possession of the premises was now subject to the Lancaster-Sun "underlying" lease that would expire on September 30, 1994. The sublease also informed the Patels that the sublease might not be renewed at the end of the lease period. While at no time during the Lancaster sale and leaseback did Sun interrupt the Patels' possession of the service station premises, according to the testimony of Lancaster general partner Bruce Robinson, Lancaster always expected that upon the expiration of the leaseback, the Patels' franchise would not be renewed because Sun had promised to remove the underground fuel tanks and clean up any environmental problems that existed on the property.

In 1991, upon the expiration of the first three-year sublease, Sun and the Patels entered into a second three-year sublease due to expire on August 21, 1994. This sublease, like the first, provided that Sun's right to grant possession of the premises was subject to the underlying Lancaster-Sun lease which would expire on September 30, 1994, and it also informed the Patels that the sublease might not be renewed at the end of the lease period. On April 28, 1994, Sun sent written notification to the Patels that their lease and franchise would not be renewed at the end of the term due to the upcoming expiration of Sun's underlying lease with Lancaster on September 30, 1994.

Beginning in 1988, the Patels filed a series of lawsuits claiming that Sun had effected a constructive termination or non-renewal of their franchise in violation of the PMPA by not first offering them the right of first refusal on the "leased marketing premises" under the PMPA. See §§ 2801(9) and 2802(b)(3)(D). The district court rejected the Patels' contentions in a series of decisions that ultimately concluded that their legal action was premature. The court reasoned that even if it were true that Sun had failed to offer the Patels the premises, the other necessary predicate act (termination or non-renewal of the lease) had not yet occurred, and indeed, might never occur. See Patel v. Sun Ref. & Mktg. Co., No. 88-3958, slip op. at 1-2 (E.D. Pa. Oct. 14, 1988) ("Patel I"); Patel v. Sun Ref. & Mktg. Co., 710 F. Supp. 1023 (E.D. Pa. 1989) ("Patel II"); Patel v. Sun Ref. & Mktg. Co., No. 88-3958, 1992 WL 25737, at *2 (E.D. Pa. Feb. 7, 1992) ("Patel III"). The Patels did not appeal these decisions.

After receiving the notification of non-renewal from Sun in 1994, the Patels filed another action, again contending that the non-renewal violated the PMPA because Sun had sold the property in 1987 without first giving them an offer to purchase it or a right of first refusal. The Patels sought injunctive relief to prevent the non-renewal as well as monetary damages for Sun's alleged violation of the PMPA. The district court denied the request for injunctive relief because it found that the Patels had not satisfied the § 2805(b)(2) preliminary injunction standard, which requires the franchisee to show "sufficiently serious questions going to the merits to make such questions a fair ground for litigation." Patel v. Sun Co., Inc., 866 F. Supp. 871, 873-74 (E.D. Pa. 1994) ("Patel IV").

In a divided opinion, we affirmed the district court's denial of the injunction, although on different grounds, not reaching the merits determination made by the district court. See Patel V, 63 F.3d at 252. We held that the injunction was barred under § 2805(e)(1), which provides that a court may not compel renewal of a franchise relationship if the basis for the non-renewal of the relationship was a decision made in good faith and in the normal course of business by the franchisor to sell its interests in the leased marketing premises. See § 2805(e)(1)(A)(iii). We remanded to the district court, however, explaining, "[t]he Patels still have. . . the opportunity to present to the district court their contention that the non-renewal of their franchise violates§ 2802 because the reason given for the nonrenewal, the expiration of the underlying lease, was a condition created by the franchisor when it sold the property without offering the franchisee an opportunity to purchase it." Patel V, 63 F.3d at 253.

On remand, both parties moved for summary judgment, and the district court granted summary judgment in favor of Sun. See Patel v. Sun Co., Inc., 948 F. Supp. 465 (E.D. Pa. 1996) ("Patel VI"). The Patel VI court held that Sun could refuse to renew the Patels' franchise without liability, based upon the underlying lease exception in §§ 2802(b)(2)(C) and 2802(c)(4). The district court relied upon our reasoning in Lugar, 755 F.2d at 53, and held that the underlying lease exception was not subject to any judicial inquiry into the circumstances surrounding Sun's decision to sell and leaseback the premises. See Patel VI, 948 F. Supp. at 473 n.3.

The Patels appealed again, and the long-running saga of "the Patels versus Sun" returns to this court anew. Section 2805(a) of the PMPA confers jurisdiction on the federal courts and creates a civil cause of action against franchisors for violations of the substantive sections of the Act. Section 2805(d) provides for the award of actual and exemplary damages, as well as reasonable attorney and expert witness fees to a franchisee who prevails against a franchisor in a civil action under the Act. Because our standard of review is plenary, see Kelly v. Drexel Univ., 94 F.3d 102, 104 (3d Cir. 1996), we apply the same test the district court should have applied in the first instance. See Olson v. General Elec. Astrospace, 101 F.3d 947, 951 (3d Cir. 1996); Helen L. v. DiDario, 46 F.3d 325, 329 (3d Cir. 1995). We must determine, therefore, whether the record, when viewed in the light most favorable to the Patels, shows that there is no genuine issue of material fact and that Sun was entitled to summary judgment as a matter of law. See, e.g., Olson, 101 F.3d at 951; Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249-50 (1986).

II.

A.

The PMPA regulates the relationship between franchisors, motor fuel refiners and distributors, and their franchisees, principally retail gas station operators. Many of these franchisees (like the Patels) lease their station premises from franchisors who (like Sun), own the premises. In 1978, after examining this relationship and determining that legislative protection for franchisees was necessary, Congress enacted the PMPA. Congress passed this legislation in large part because it was concerned that franchisors had been using their superior bargaining power to compel compliance with certain marketing policies and to gain an unfair advantage in contract disputes. See Slatky, 830 F.2d at 478 (citing S. Rep. No. 731, 95th Cong., 2d Sess. 17-19, reprinted in 1978 U.S.C.C.A.N. 873, 875-77) ("Senate Report"); Patel V, 63 F.3d at 250. In addition, Congress wanted to protect franchisees from "arbitrary or discriminatory terminations and non-renewals." Senate Report at 18, 1978 U.S.C.C.A.N. 877. As we noted in Slatky, when it passed the PMPA:

Congress determined that franchisees had a "reasonable expectation[]" that "the [franchise] relationship will be a continuing one." The PMPA's goal is to protect a franchisee's "reasonable expectation" of continuing the franchise relationship while at the same time insuring that distributors have "adequate flexibility . . . to respond to changing market conditions and consumer preferences."

830 F.2d at 478 (citing the Senate Report at 18-19).

The PMPA prohibits franchisors from terminating or nonrenewing franchises except under certain prescribed situations. See § 2802(a). It also enumerates a series of grounds that permit a franchisor to terminate or nonrenew one of its franchisees without PMPA liability. See § 2802(b). These bases can be roughly separated into two categories: franchisee misconduct*fn2 and legitimate franchisor business decisions. In this case, only the latter, which ...


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