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Allen Ray Klein et al v. Chevron U.S.A.

January 25, 2012

ALLEN RAY KLEIN ET AL., PLAINTIFFS AND APPELLANTS,
v.
CHEVRON U.S.A., INC. ET AL., DEFENDANTS AND RESPONDENTS.



APPEAL from a judgment of the Superior Court of Los Angeles County. Carl J. West, Judge. Affirmed in part, reversed in part and remanded for further proceedings. (Los Angeles County Super. Ct. No. BC367812)

The opinion of the court was delivered by: Zelon, J.

CERTIFIED FOR PUBLICATION

INTRODUCTION

Plaintiffs filed a class action complaint against defendant and respondent Chevron U.S.A., Inc. asserting claims for violation of the Unfair Competition Law (Bus. & Prof. Code, § 17200) (UCL or section 17200), violation of the Consumers Legal Remedies Act (Civ. Code, § 1750 et. seq.) (CLRA), breach of contract and unjust enrichment. Plaintiffs' claims are predicated on Chevron's practice of purchasing wholesale motor fuel in gallon units at a standardized temperature of 60 degrees Fahrenheit, but selling motor fuel to California consumers at an average temperature of approximately 70 degrees. Plaintiffs allege that, because motor fuel expands as it is heated, Chevron's failure to compensate for temperature increases in retail motor fuel, or to disclose the effects of such increases, harms consumers in several ways. First, consumers receive less motor fuel - measured by mass and energy - than they would receive if Chevron adjusted for temperature increases. Second, consumers are led to believe that each gallon of motor fuel contains a standardized amount of energy, when, in fact, the energy content varies depending on the temperature of the fuel at the time of purchase. Third, consumers are unable to determine the actual price of motor fuel or to compare prices between retailers. Fourth, Chevron is able to collect and retain more motor fuel taxes from consumers than it is required to pay to the government.

Chevron filed a demurrer arguing that, as a matter of law, it could not be sued for failing to adjust the temperature of retail motor fuel because California law permitted the practice. The trial court sustained Chevron's demurrer to plaintiffs' claims for breach of contract, unjust enrichment and "unlawful" business practices under section 17200. However, the court overruled Chevron's demurrer to plaintiffs' CLRA claim and their claims for "unfair" and "fraudulent" business practices under section 17200.

Several months after the court issued its ruling, the California Energy Commission released a statutorily-mandated report examining the benefits of implementing "Automatic Temperature Compensation" (ATC) fuel pump technology that would compensate for temperature increases in retail motor fuel. The report concluded that consumers would not realize any economic benefit from requiring retailers to implement the use of ATC fuel pumps.

Chevron filed a motion for judgment on the pleadings arguing that, in light of the California Energy Commission's (CEC) report, the trial court should dismiss plaintiffs' remaining claims under the judicial abstention doctrine. The trial court granted the motion, ruling that the CEC report demonstrated that the Legislature intended to address the issues in plaintiffs' complaint and that adjudicating plaintiffs' claims would improperly enmesh the court in complex areas of economic policy.

On appeal, plaintiffs argue that the trial court erred in: (1) dismissing their claims arising under the CLRA and the "unfair" and "fraudulent" prongs of the UCL pursuant to the judicial abstention doctrine; and (2) sustaining Chevron's demurrer to their claims for breach of contract, unjust enrichment and "unlawful" business practices under the UCL. Chevron argues that we should affirm the trial court's order granting its motion for judgment on the pleadings, or, alternatively, reverse the trial court's order overruling Chevron's demurrer to plaintiffs' UCL and CLRA claims.

We reverse the trial court's order granting Chevron's motion for judgment on the pleadings and affirm in part and reverse in part its order on Chevron's demurrer.

FACTUAL AND PROCEDURAL BACKGROUND

A. Background Facts Regarding the Effect of Temperature on Motor Fuel*fn1

1. The effect of temperature increases on retail motor fuel

Motor fuel expands in volume as it is heated. As a result of this thermal expansion, a gallon of motor fuel at a warmer temperature has less mass and less energy content than a gallon of motor fuel at a cooler temperature. A temperature increase of 15 degrees causes motor fuel to expand in volume by approximately one percent, with a corresponding one percent decrease in energy output. For example, when 231 cubic inches of motor fuel, which equals one volumetric gallon, is heated from 60 degrees Fahrenheit to 75 degrees Fahrenheit, the motor fuel will expand to occupy a volume of approximately 233 cubic inches.

To avoid inequities that result from selling motor fuel at different temperatures, the National Bureau of Standards, in conjunction with the American Petroleum Institute, established an industry standard known as "ASTM-IP D 1250" (D 1250). This standard defines a "U.S. Petroleum Gallon" as 231 cubic inches of petroleum at 60 degrees Fahrenheit. The inclusion of a temperature component in the definition of a U.S. Petroleum Gallon "ensure[s] that the amount of fuel [and energy] contained in every defined 'gallon' [i]s exactly the same amount."

For purchases made at the wholesale level, Chevron and other participants in the petroleum industry use D 1250 to adjust for differences in the temperature of motor fuel. This practice is reflected in Business & Professions Code section 13520*fn2 , which mandates that, for any transaction involving the sale of 5,000 or more gallons of motor fuel, the distributor must offer to sell the fuel "at the temperature-adjusted gallonage of 60 degrees."

However, when selling motor fuel at the retail level, Chevron does not compensate for increases in fuel temperature. Instead, Chevron sells retail motor fuel based solely on volume, measured in gallon units equaling 231 cubic inches. Because retail motor fuel sold to California consumers is, on average, in excess of 70 degrees Fahrenheit, consumers receive less fuel (measured in terms of mass and energy) than they would receive if the fuel was delivered at the temperature-adjusted standard of 231 cubic inches at 60 degrees Fahrenheit. "As a result, consumers in California [are forced to] spend billions of dollars more each year to purchase the same quantity of motor fuel they would have received" if the fuel was adjusted to 60 degrees Fahrenheit. Moreover, because the temperature of retail motor fuel varies depending on location, "the amount of motor fuel that a consumer actually obtains at a given price varies from retailer to retailer and from purchase to purchase."

2. Chevron's practice of selling non-temperature adjusted fuel enables it to collect more in motor fuel taxes than it is required to pay to the government

Chevron's failure to compensate for temperature increases in retail motor fuel also has significant tax consequences. In California, gasoline is subject to a combined state and federal tax rate of approximately 36 cents per gallon, while diesel fuel is subject to approximately 42 cents of taxes per gallon. Under relevant tax laws, motor fuel distributors are required to pay the government motor fuel taxes at the wholesale level based on the total number of U.S. Petroleum Gallons purchased in each transaction.

At the retail level, Chevron passes these taxes on to consumers by charging approximately 36 cents for each gallon of gasoline and 42 cents for each gallon of diesel fuel. Because the temperature of retail motor fuel sold in California is, on average, above 60 degrees Fahrenheit, Chevron collects taxes on more gallons of motor fuel at retail than it is required to pay for at the wholesale level. For example, if Chevron purchased 10,000 U.S. Petroleum Gallons of motor fuel at wholesale, and sold that same motor fuel to consumers at a temperature of 75 degree Fahrenheit, it would be required to pay taxes on 10,000 gallons of fuel, but would collect taxes from consumers on approximately 10,100 gallons.*fn3 Because Chevron and other retailers do not compensate for temperature increases in motor fuel at the retail level, California consumers pay "hundreds of millions dollars" more in purported "taxes" than the retailers actually pay to the government.

3. Temperature Compensation Technology

Technology currently exists that would enable Chevron and other distributors to compensate for temperature differences in motor fuel sold at retail. The State of California has sanctioned the use of ATC retail fuel dispensers that would ensure that each gallon of motor fuel sold to consumers meets the standard measure of a U.S. Petroleum Gallon - the equivalent of 231 cubic inches at 60 degrees Fahrenheit. ATC pumps adjust each "gallon" of motor fuel to provide slightly more than 231 cubic inches when the temperature of the fuel exceeds 60 degrees Fahrenheit at the time of purchase. If, for example, the temperature of motor fuel was 75 degrees Fahrenheit at the time of purchase, an ATC pump would provide the consumer approximately 233 cubic inches of fuel for each pumped "gallon." Alternatively, if the temperature of motor fuel was less than 60 degrees Fahrenheit at the time of purchase, the ATC pump would provide slightly less than 231 cubic inches of fuel for each pumped "gallon."

Alternative technologies permit temperature compensation by "adjusting the . . . posted price per gallon depending on whether the temperature of the fuel is higher or lower than 60 degrees Fahrenheit, so as to achieve uniform prices based on a consistent standard." For example, if the temperature of motor fuel was 75 degrees at the time of purchase, and the fuel was being offered at the price of $3.00 a gallon, the pump would provide 231 cubic inches of motor fuel for each pumped gallon, but charge slightly less than $3.00 for each such gallon.

The petroleum industry has voluntarily implemented the use of ATC fuel pump technology in Canada, where the average temperature of retail motor fuel is less than 60 degrees Fahrenheit. "[I]f the petroleum industry were to measure its deliveries of motor fuel to Canadian consumers [without ATC technology], the industry would deliver . . . substantially larger quantities of motor fuel per . . . 'gallon' [to Canadian consumers] than by measuring deliveries of motor fuel by the industry standard 'gallon' of 231 cubic inches of motor fuel at 60 degrees Fahrenheit."

However, the petroleum industry has pressured ATC pump manufacturers not to sell their equipment in places such as California, where the average temperature of motor fuel exceeds 60 degrees Fahrenheit. In sum, because the petroleum industry profits from selling retail motor fuel at a higher temperature than it acquires the fuel at wholesale, the industry has supported the use of ATC technology in regions with colder climates, but opposed the use of such technologies in regions with warmer climates.

4. California's investigation of temperature disparities in retail motor fuel

In October 2007, the California Legislature passed section 13630, which required the CEC, in partnership with the California Department of Food and Agriculture (CDFA) and the California State Air Resources Board (CARB), to conduct a "comprehensive survey and cost-benefit analysis" of temperature variations in retail motor fuel.

Section 13630 directed the CDFA to conduct a survey determining the average temperature of retail motor fuel in California. (§ 13630, subd. (a)(1).) The statute further required that CEC use the results of the CDFA survey to prepare a "cost-benefit analysis" of several possible methods of remedying temperature variations in retail motor fuel, including "the installation of temperature correction or compensation equipment at the pump." (§ 13630, subd. (a)(2)(D).)

The statute ordered CDFA, CEC and CARB to "conduct public hearings on the results of the cost-benefit analysis and report to the Legislature regarding recommended legislation and regulations based on the results of the study not later than December 31, 2008."

B. Summary of Plaintiffs' Second Amended Complaint

1. General allegations

In March 2007, plaintiffs filed a class action lawsuit challenging Chevron's practice of purchasing wholesale motor fuel in U.S. Petroleum Gallons (231 cubic inches at 60 degrees Fahrenheit) and selling motor fuel at retail on a purely volumetric basis (231 cubic inches without reference to temperature). The second amended complaint, which was filed in March of 2008,*fn4 included four causes of action: (1) violation of the Unfair Competition Law (§ 17200); (2) violation of the Consumer Legal Remedies Act (Civ. Code, § 1770); (3) breach of contract; and (4) unjust enrichment.

In the "Factual Background" portion of the second amended complaint, plaintiffs alleged that Chevron's practice of selling retail motor fuel in non-temperature adjusted gallon units harms consumers in several ways. First, consumers are required to purchase significantly more fuel to obtain the same amount of energy they would receive if the fuel was sold in temperature-adjusted gallons. Second, selling non-temperature adjusted motor fuel enables Chevron to collect and retain more taxes from consumers than it is required to pay to the government. Third, by advertising motor fuel in "gallon" units without adjusting for temperature increase or disclosing the effect of thermal expansion, Chevron deceives consumers into believing that each gallon of motor fuel will provide the same amount of energy output. Fourth, Chevron's sale of non-temperature adjusted fuel has anti-competitive effects because consumers are unable to ascertain the true price of the fuel that they are purchasing or to accurately compare prices between different retail outlets.

2. Summary of individual causes of action

a. Claims arising under the UCL and the CLRA

Plaintiffs' section 17200 claim alleged that, by selling motor fuel at a specified price per gallon without adjusting for temperature expansion or disclosing the effect of temperature increases on motor fuel, Chevron had committed numerous "unfair, unlawful or fraudulent practices" including, in relevant part: (1) representing "motor fuel unit prices in terms of [a] standard unit of a 'gallon,' when in fact [Chevron] deliver[s] non-standard 'gallons' of motor fuel measured volumetrically without reference to temperature"; (2) "[c]harging to and receiving from [consumers] an amount in purported reimbursement for motor fuel taxes in excess of the amount of fuel taxes actually due and paid at the wholesale level"; (3) "[f]ailing to adjust the price of a 'gallon' of motor fuel sold to [consumers] when the temperature of such motor fuel exceeds 60 degrees Fahrenheit"; (4) concealing that retail motor fuel is ordinarily sold at a temperature substantially exceeding 60 degrees Fahrenheit; (5) concealing that the standard U.S. Petroleum Gallon in the motor fuel industry is 231 cubic inches at 60 degrees Fahrenheit; (6) concealing that the energy content of motor fuel sold at retail contains less energy than the standard U.S. Petroleum Gallon; and (7) concealing that the energy content of motor fuel sold at retail varies according to temperature and that the term "gallon" is not a standard unit of measure.

Plaintiffs' CLRA claim alleged that several of these same acts and omissions qualified as "misrepresentations as to the characteristics and quantities" of motor fuel, in violation of Civil Code section 1170, subdivision (a)(5).

Plaintiffs' UCL and CLRA claims sought numerous remedies, including damages, restitution and attorneys' fees. In addition, plaintiffs sought injunctive relief requiring Chevron to take various alternative acts, including, in part: (1) installing ATC technologies on retail fuel pumps; (2) adjusting the price of motor fuel when the temperature of the fuel exceeds 60 degree Fahrenheit; and (3) notifying consumers of the temperature at which motor fuel is sold and the effect of temperature on the energy content of motor fuel.

b. Plaintiffs' claims for breach of contract and unjust enrichment

Plaintiffs' breach of contract claim, which sought compensatory damages, alleged that consumers who purchased Chevron motor fuel reasonably understood that the advertised price of a "gallon" of motor fuel referred to U.S. Petroleum Gallons, rather than volumetric gallons that did not compensate for temperature. Chevron purportedly breached this term of its sales agreement by selling motor fuel in volumetric gallons that did not adjust for temperature variation.

Plaintiffs' fourth claim alleged that Chevron had been "unjustly enriched to the detriment of [consumers] on the sale of volumetric gallons of motor fuel in excess of 60 degrees Fahrenheit."

C. Chevron's Demurrer to the Second Amended Complaint

On April 11, 2008, Chevron filed a demurrer to the Second Amended Complaint arguing that each of plaintiffs' claims failed "as a matter of law." First, Chevron argued that selling motor fuel in non-temperature adjusted gallon units did not violate the UCL or the CLRA because: (1) California law requires or otherwise authorizes the sale of non-temperature adjusted fuel at the retail level; (2) businesses are not required to "pass [] on the benefits of, or disclose to, its retail customers the terms of its actual wholesale level transactions[;]" and (3) plaintiffs had failed to identify any statement or representation made by Chevron that could create an expectation among consumers that they would "receive . . . temperature-adjusted motor fuel."

Chevron's demurrer also argued that plaintiffs had failed to state a claim for breach of contract because consumers could not reasonably interpret the term "gallon" to mean "U.S. Petroleum Gallons" (231 cubic inches at 60 degrees Fahrenheit). Chevron asserted that California law specifically defined the word "gallon" to mean "231 cubic inches" without reference to temperature, and, as a result, consumers could not assign a meaning to the term that included a temperature component.

Chevron also argued that plaintiffs were prohibited from asserting a cause of action for unjust enrichment because other portions of their complaint alleged the existence of a valid contract. According to Chevron, unjust enrichment was a "quasi-contract theory" that was unavailable in cases where the "'parties have an actual [contract] covering [a subject].'"

On May 30, 2008, the trial court issued an order overruling Chevron's demurrer to plaintiffs' claims for "unfair" and "fraudulent" business practices under section 17200 and their claim for violation of the CLRA. However, the trial court sustained Chevron's demurrer to plaintiffs' claims for unjust enrichment and "unlawful" business practices without leave to amend, and sustained Chevron's demurrer to the breach of contract claim with leave to amend.

The trial court concluded that plaintiffs had adequately stated a claim under section 17200's "unfairness" prong. The court explained that the "balancing test" applicable to "unfairness" claims was "not amenable to resolution at the pleading stage" and "should be determined on a developed factual basis." The court further explained that "a reasonable view is that the practice of measuring gas for purposes of paying the fuel taxes on a temperature adjusted basis, while selling gas in temperate climates on a non-temperature adjust basis (and collecting taxes thereon), is unfair and deceptive." It also concluded that "the practice of measuring gas at the wholesale level on a temperature adjusted basis, and failing to do so at the retail/consumer level where such conduct only benefits the seller, may prove to be inherently unfair and deceptive." In reaching its ruling, the court rejected Chevron's contention that California law required or implicitly authorized retailers to sell non-temperature adjusted motor fuel at the retail level.

The court also ruled that plaintiffs had properly stated claims under section 17200's "fraudulent" prong and the CLRA. The court concluded that plaintiffs had "alleged facts which, if true, may reveal that members of the public had an 'expectation' or 'assumption' that the 'gallons' they were purchasing were temperature-adjusted gallons. As with the UCL 'unfair' claim, . . . the ultimate viability of the UCL 'fraudulent' claim should be [determined] on a factual basis." The court further explained that because the CLRA utilized the same standard that applied to claims arising under the fraudulent prong of the UCL, plaintiffs had properly stated a claim for violation of the CLRA.

However, the court ruled that the plaintiffs had failed to state a claim under section 17200's "unlawful" prong. The court agreed with Chevron's assertion that selling retail motor fuel in volumetric gallons could not be deemed "unlawful" because California law required retail motor fuel to be sold in "gallons," and defined the term "gallon" to mean 231 cubic inches without reference to temperature. The court further ruled that Chevron's practice of paying government taxes based on the number of U.S. Petroleum Gallons purchased at wholesale, but collecting taxes from consumers based on the number of volumetric gallons sold at retail without reference to temperature, did not violate any statute or regulation, and therefore, was not "unlawful."

The court also ruled that plaintiffs had failed to state a claim for breach of contract or unjust enrichment. The court explained that, contrary to the allegations in plaintiffs' complaint, Chevron's use of the word "gallon" could not be reasonably interpreted as an offer to sell only "U.S. Petroleum Gallons" because: (1) California law defined the term "gallon" as 231-cubic inches without reference to temperature, and this definition was, by operation of law, implied into every sales contract; and (2) a consumer would have "no basis on which to assume an 'industry standard' as a term of his or contract to purchase."

In regard to plaintiffs' unjust enrichment claim, the court ruled that, "'as a matter of law, a quasi-contract action for unjust enrichment does not lie where . . . express binding agreements exist and define the parties' rights.'" The court concluded that because plaintiffs had "alleg[ed] that agreements exist defining the parties' rights," they could not pursue a claim for unjust enrichment.*fn5

E. Plaintiffs' Third Amended Complaint

After the trial court issued its ruling on Chevron's demurrer, plaintiffs filed a third amended complaint that made several changes to its breach of contract claim. First, plaintiffs added allegations explaining why consumers reasonably interpreted the term "gallon" in Chevron's retail motor fuel advertisements to mean U.S. Petroleum Gallons, rather than volumetric gallons without reference to temperature. Second, plaintiffs added allegations asserting that, because Chevron retail outlets displayed the statement "'$price per gallon including taxes,'" consumers understood "a material term of that [sales] agreement was that . . . the Defendant was in essence collecting reimbursement for taxes actually paid on each gallon so purchased." Chevron allegedly breached that term "by charging [consumers] for purported taxes which they in fact retained."

On August 4, 2008, Chevron filed a demurrer to the Third Amended Complaint arguing that plaintiffs had still failed to state a claim for breach of contract because: (1) the amended complaint did not address the fact that California law defines the term "gallon" to mean 231 cubic inches without reference to temperature, (2) the phrase "$price per gallon including taxes" could not be reasonably interpreted as creating any contractual duty regarding the payment of taxes to government entities. Chevron also renewed its demurrer to the remaining portion of plaintiffs' UCL claim and their CLRA claim, which had not been amended in the Third Amended Complaint.

The trial court sustained Chevron's demurrer to the breach of contract claim without leave to amend, but overruled the demurrer on plaintiffs' remaining UCL and CLRA claims. On plaintiffs' breach of contract claim, the trial court agreed with Chevron that: (1) consumers could not reasonably interpret the term "gallon" as referencing U.S. Petroleum Gallons, and (2) the phrase "$price per gallon including taxes" could not be reasonably interpreted as a contractual obligation requiring Chevron to remit all tax revenues to government authorities.

On the UCL and CLRA claims, the court ruled that Chevron had merely re-asserted the same arguments set forth in its demurrer to plaintiffs' Second Amended Complaint, which the court had already rejected.

F. CEC Cost-Benefit Analysis and Chevron's Motion for Judgment on the Pleadings

1. Summary of the CEC Cost-Benefit Analysis

In March 2009, the CEC, in compliance with section 13630, issued the final version of its cost-benefit analysis regarding "the implementation of Automatic Temperature Compensation devices at retail stations." The CEC concluded that if ATC technologies had been in place at retail gas stations during the one-year study period, Californians would have purchased "about 117 million gallons less compared to status quo (no ATC at retail outlets) because the fuel was warmer (71.1 degrees Fahrenheit) than the 60 degrees Fahrenheit reference standard." The study further concluded that "[i]f ATC were mandated for use at ...


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