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UNIFIED DEALER GROUP v. TOSCO CORP.

September 11, 1998

UNIFIED DEALER GROUP, a California Nonprofit Corporation, et al., Plaintiffs,
v.
TOSCO CORPORATION, a Nevada corporation, et al., Defendants.



The opinion of the court was delivered by: BREYER

MEMORANDUM AND ORDER

 The lawsuit presents an issue of first impression: whether the Petroleum Marketing Practices Act ("PMPA") permits a franchisor to condition renewal of a motor fuel franchise upon a change in the franchise trademark. Currently pending before the Court is the motion of defendants Tosco Corporation and Tosco Northwest Company ("Tosco") for summary judgment on plaintiffs' complaint. After carefully considering the papers submitted by the parties, including their supplemental memoranda, and having had the benefit of oral argument on June 11, 1998 and August 24, 1998, the motion for summary judgment is GRANTED.

 BACKGROUND

 I. Factual Background

 Tosco is an independent refiner and marketer of petroleum products without its own source of crude oil. Tosco sells refined petroleum products, including motor fuel, at the wholesale and retail level. In 1994, Tosco acquired from BP Exploration & Oil, Inc. ("BP Exploration") all service station properties owned or leased by BP Exploration in Northern California, together with marketing distribution facilities. Tosco also acquired from BP Exploration a license to use the "BP" trademark in California. The license expires on August 1, 2006. In connection with the license, Tosco pays a royalty to BP Exploration. Beginning in August 1999, the amount of the royalty fee for the license will increase.

 BP Exploration terminated its franchise agreements, in connection with its withdrawal from the California market, with an effective termination date of January 15, 1995. Tosco subsequently offered each of the BP franchisees a new franchise agreement. The plaintiff BP service station dealers have accordingly been Tosco franchisees since early 1995. They (or their predecessors) have been operating under the BP brand name since 1989, when BP Exploration purchased the service stations from Mobil Oil. The franchise agreements entered into between Tosco and each plaintiff were for an initial term of three years to expire on January 16, 1998. These franchises were extended by mutual agreement to expire on April 15, 1998.

 On March 31, 1997, Tosco purchased from the Union Oil Company of California ("Union") the 76 Products Company which included approximately 900 service stations in California. Tosco also acquired the exclusive right to use the "Union 76" and "76" trademarks in perpetuity. In connection with the purchase, Tosco entered into franchises with the Union service station dealers.

 From March through September 1997, Tosco began to analyze the efficiencies that could be realized by marketing its motor fuel under one brand in California, instead of both the Union 76 and BP brands. Tosco subsequently decided to "rebrand" its existing BP service stations to Union 76 stations and authorized a capital expenditure of more than $ 22 million to carry-out the rebranding.

 In December 1997, prior to the expiration of plaintiffs' franchise agreements, Tosco offered to renew its franchise relationship with each plaintiff. It offered each plaintiff the same franchise agreement. Tosco's offer of renewal included the condition that the service station market its fuel under the Union 76 trademark. The plaintiff service station dealers refused to agree to the change in the trademark. Tosco subsequently gave the plaintiffs notice that it was not renewing its franchise relationship with plaintiffs on the ground that plaintiffs had refused to agree to a change in a provision of the franchise within the meaning of 15 U.S.C. § 2802(b)(3)(A). This lawsuit followed.

 II. Procedural History.

 Plaintiffs filed this lawsuit in January, 1998. They allege that Tosco's insistence on a rebranding of its BP stations to the Union 76 trademark violates the PMPA and is a breach of the franchise agreements. The Court granted a preliminary injunction, enjoining Tosco from terminating the franchises, on April 9, 1998 on the ground that "the question of whether defendants' demand that plaintiffs rebrand as a condition of renewing the franchise relationship is a proposed change 'in the provision of the franchise,' within the meaning of 15 U.S.C. § 2802(b)(3)(A), is a sufficiently serious question going to the merits to make such question a fair ground for litigation."

 Tosco subsequently moved for summary judgment. After reviewing the parties' memoranda, and hearing oral argument on June 11, 1998, the Court continued the motion for summary judgment to give plaintiffs the opportunity to conduct discovery on whether Tosco made the decision to rebrand in good faith in the normal course of business, and in particular, whether it in good faith considered whether to rebrand those BP stations that are in close proximity to, and therefore in competition with, preexisting Union 76 stations. After the parties simultaneously filed supplemental memoranda, the Court heard oral argument on August 23, 1998.

 DISCUSSION

 I. THE PMPA CLAIM.

 The PMPA was adopted in 1978 in response "to a widespread perception that the petroleum marketing industry was undergoing drastic changes, with a trend toward fewer stations." Valentine v. Mobil Oil Corp., 789 F.2d 1388, 1390 (9th Cir. 1986). The purpose of the Act was to correct what Congress "perceived as an inequality in bargaining power between distributors of petroleum products and their franchisees by giving franchisees certain protections from arbitrary termination or nonrenewal." Id. The PMPA provides franchisees with certain procedural rights, see 15 U.S.C. § 2804, and delineates the grounds upon which a franchisor may terminate a franchise or refuse to renew a franchise relationship upon expiration of a franchise agreement. See 15 U.S.C. § 2802. A "franchise" consists of a contract between a franchisor and a franchisee, see 15 U.S.C. § 2801(1), and a "franchise relationship" consists of the mutual obligations and responsibilities of the parties arising from the marketing of motor fuel under a franchise. See id. § 2801(2). "Under the PMPA, the franchisor has (absent specific cause) an obligation to renew only the franchise relationship, not the particular franchise." Valentine, 789 F.2d at 1391; see also Svela v. Union Oil Company of California, 807 F.2d 1494, 1500 (9th Cir. 1987) (same).

 Tosco gave plaintiffs notice that it was refusing to renew its franchise relationship with plaintiffs pursuant to 15 U.S.C. § 2802(b)(3)(A) which provides as follows:

 
(A) The failure of the franchisor and the franchisee to agree to changes or additions to the provisions of the franchise, if--
 
(i) such changes or additions are the result of determinations made by the franchisor in good faith and in the normal course of business; and
 
(ii) such failure is not the result of the franchisor's insistence upon such changes or additions for the purpose of converting the leased marketing premises to operation by employees or agents of the franchisor for the benefit of the franchisor or otherwise preventing the renewal of the franchise relationship.

 Plaintiffs contend that Tosco's nonrenewal violates the PMPA because (1) changing the franchise trademark is not a change to the provisions of the franchise, but rather, a termination of the franchise; and (2) Tosco's decision does not meet the requirements of subsections (i) and (ii). In a PMPA matter, the franchisor, here Tosco, bears the burden of going forward with evidence to establish as an affirmative defense that the ...


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