Shell v. K.E.M. ( 1995 )

USCA1 Opinion

          October 26, 1995      [NOT FOR PUBLICATION]



                            UNITED STATES COURT OF APPEALS

                                FOR THE FIRST CIRCUIT




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        No. 95-1314



                                  SHELL OIL COMPANY,



                                Plaintiff, Appellant,



                                          v.



                                K.E.M. SERVICE, INC.,



                                 Defendant, Appellee.




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                     APPEAL FROM THE UNITED STATES DISTRICT COURT



                           FOR THE DISTRICT OF RHODE ISLAND



                    [Hon. Francis J. Boyle, Senior District Judge]
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                                Cyr, Boudin and Lynch,



                                   Circuit Judges.
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             George A. Nachtigall, with whom Mark A. Pogue, Marc A. Crisafulli
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        and Edwards & Angell were on brief for appellant.
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             Paul J. Pisano, with  whom Paul J. Pisano Law  Associates, Albert
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        R. Romano and Romano, Spinella & Hayes were on brief for appellee.
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                    Per Curiam.   Shell  Oil Company ("Shell")  sued, under
Per Curiam.
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          the  Petroleum Marketing Practices Act, 15 U.S.C.    2801 et seq.
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          ("PMPA"),  to terminate  its franchise  agreement and  lease with



          K.E.M. Service,  Inc. ("K.E.M.")  due to alleged  contract viola-



          tions.  K.E.M. counterclaimed, and  Shell now appeals a  prelimi-



          nary  injunction requiring  it  to continue  selling gasoline  to



          K.E.M. pending final adjudication  of Shell's PMPA-based  claims.



          See Shell Oil Co. v. K.E.M. Serv., Inc., No. 95-001B (D.R.I. Feb.
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          16, 1995).   As the record  does not enable a  determination that



          the district  court manifestly  abused its discretion  in finding



          that  "there exist  sufficiently serious  questions going  to the



          merits [of  Shell's claims and  K.E.M.'s defenses]  to make  such



          questions a fair  ground for litigation," 15 U.S.C.   2805(b)(A),



          we affirm.



                    We state  the material facts  briefly.  K.E.M.  and its



          president/owner,  John Gorter,  operate a  Shell retail  gasoline



          station in East Greenwich, Rhode Island.  Their current five-year



          franchise and lease agreement (hereinafter:  "Agreement") expires



          in 1998.   According to K.E.M., Shell decided in  1993 to install



          another  franchisee  on  the  leased premises,  and  when  Gorter



          declined  a buy-out offer, Shell initiated  a bad-faith effort to



          oust  K.E.M. prematurely from its  franchise/lease.  To this end,



          Shell  audited and cited  K.E.M. for  violations of  Rhode Island



          environmental regulations, specifically for its failure to keep a



          written record of daily gasoline inventory reconciliations on the



          leased premises.  Further,  Shell abruptly altered its longstand-





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          ing  policy of delivering "short  loads"    i.e.,  less than full



          tank-truck  loads  of gasoline     to  K.E.M.   Since  K.E.M. has



          limited underground  storage-tank capacity, it was  forced to buy



          and  sell non-Shell gasoline in short loads, or else cease opera-
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          tion.



                    Shell contends that its alleged bad faith is irrelevant



          under  the  PMPA, given  that  K.E.M. admittedly  engaged  in the



          "willful adulteration, mislabeling or  misbranding of motor fuels



          or other  trademark violations."   15  U.S.C.    2802(c)(10); see
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          Agreement Art. 18.1(c)(10) (same).  Shell also argues that, in at



          least  two respects, K.E.M. "knowing[ly] fail[ed] . . . to comply



          with .  .  . State  .  . .  [environmental]  laws or  regulations



          relevant to the operation of the marketing premises," 15 U.S.C.



          2802(c)(11); Agreement  Art. 18.1(c)(11) (same).  First, although



          K.E.M.  kept gasoline  inventory  figures and  performed a  daily



          inventory reconciliation, it failed to record the final amount of



          any  differential in its written records.  See Rhode Island Dep't
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          of Envtl.  Management  Regulation DEM-DWM-UST04-93,     13.00  et
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          seq.  (1993).  Second, K.E.M.'s records were in the possession of
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          its  accountant, rather than at the service station.  Shell cites



          case law to the effect that a franchisor's unilateral termination



          of a franchise is conclusively presumed "reasonable," as a matter



          of law and regardless whether the motives for the termination are



          unfairly coercive  or sinister,  if the franchisee  has committed



          any of the twelve acts enumerated in PMPA   2805(c).   See, e.g.,
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          Russo v. Texaco, 808 F.2d 221, 225 (2d Cir. 1986).
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                    K.E.M. counters  that PMPA    2802(c)  contemplates two



          types of equitable exceptions to  the presumption prescribed in



          2805(c).   First, any purported PMPA  recordkeeping violation was



          merely  "technical," since  K.E.M.  substantially  complied  with



          Rhode Island environmental regulations.  Second, Shell  pressured



          K.E.M.  into violating  the PMPA  ban on gasoline  misbranding by



          preying on  its hand-to-mouth  fiscal condition when  it abruptly



          changed its  longstanding course of dealing  regarding deliveries



          of "short loads."   K.E.M. contends that it faced  an irresoluble



          dilemma:   either buy non-Shell gasoline for resale, or cease its



          retail operation for  more than seven days,  thereby committing a



          separate violation  constituting an independent  ground for fran-



          chise termination.  See 15 U.S.C.   2802(c)(9).
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                    An appellant challenging a preliminary  injunction must



          bear  the  "heavy  burden" of  showing  that  the  district court



          committed a mistake  of law  or a manifest  abuse of  discretion.



          Gately  v. Commonwealth  of Mass.,  2 F.3d  1221, 1225  (1st Cir.
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          1993), cert.  denied, 114  S. Ct.  1832 (1994); see  28 U.S.C.
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          1292(a)(1).   Due  deference must be  accorded the  ruling below,



          since the district court is "steeped in the nuances of a case and



          mindful of the  texture and scent of the evidence."  K-Mart Corp.
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          v. Oriental Plaza, Inc., 875 F.2d 907, 915 (1st Cir. 1989).
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                    Under the  PMPA, preliminary injunctive relief  is more



          readily available to franchisees than was the case at common law.



          See, e.g., Narragansett Indian  Tribe v. Guilbert, 934 F.3d  4, 5
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          (1st Cir. 1991) (describing  four-part, common law standard); but
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          cf.  Nassau Boulevard Shell Serv. Station, Inc. v. Shell Oil Co.,
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          875 F.2d 359,  364 (2d  Cir. 1989) (noting  that PMPA  franchisor
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          must  meet  traditional, four-part  test for  preliminary injunc-



          tion).   Because  the PMPA  is a remedial  statute, see  infra, a
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          franchisee  need not demonstrate  a likelihood of  success on the
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          merits, but  merely that the franchisor  terminated the franchise



          and that "there exist sufficiently serious questions going to the
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          merits to make such  questions a fair ground for  litigation." 15
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          U.S.C.   2805(b)(1)(A) (emphasis  added).  See, e.g., Doebereiner
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          v. Sohio Oil Co., 880 F.2d 329, 332 (11th Cir. 1989), modified on
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          other grounds, 893  F.2d 1275  (1990); Sun  Ref. &  Mktg. Co.  v.
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          Rago, 741 F.2d 670, 673 (3d Cir. 1984).1
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                    Based  on a careful evaluation  of the record below, we



          cannot  conclude  that  the  district court  either  committed  a



          mistake of law or  abused its discretion in ruling  that K.E.M.'s



          proposed defenses were "sufficiently serious" to constitute "fair



          ground[s] for  litigation."  Contrary to  Shell's contention, the



          question whether the PMPA  admits of "equitable" exceptions which



          would excuse a franchisee's noncompliance with state  environmen-



          tal regulations or its gasoline  misbranding are matters of first



          impression in this circuit,  upon which we express no  opinion at










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               1PMPA   2805(b)(2)(B) does require  the court to balance the

          relative hardships to the parties in granting or denying prelimi-

          nary  injunctive relief.  Shell does not challenge this aspect of

          the district court ruling.  See Shell Oil Co., No.  95-001B, slip
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          op. at 15 (D.R.I. Feb. 16, 1995).



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          this juncture.2



                    Proper  resolution of  these  important  matters     if



          necessary    requires a more thorough exposition of the course of



          dealing between  the  parties during  their  nine-year  franchise



          relationship.   For  example,  section 2805(c)(11)  proscribes  a



          franchisee's "knowing failure" to comply with state law.  Section
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          2801(13),  however,   defines "failure"  to exclude  "any failure
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          which is only technical or unimportant to the franchise relation-
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          ship."   15 U.S.C.    2801(13)(A).  Although  Shell contends that



          K.E.M.'s violation  was not  "technical," it adduced  no evidence



          that  it had  ever threatened  to terminate  or terminated  other



          franchisees for comparable regulatory noncompliance, nor that the



          State  of Rhode Island had ever cited  or fined a service station



          owner for these types of violations. See S. Rep. No. 95-731, 95th
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          Cong.,  2d Sess.  15,  reprinted in  1978  U.S.C.C.A.N. 873,  874
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          (noting that Congress designed the PMPA  with the general purpose




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               2Our decision in Desfosses v. Wallace Energy, Inc., 836 F.2d
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          22 (1st  Cir. 1987), deals with PMPA   2802(c)(4), and not with

          2802(c)(10) or (11).  Although we there referred in general terms

          to  the "conclusive  presumption  of  reasonableness" theory  set

          forth in Russo, supra,  Desfosses had not defended on  the ground
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          that  the franchisor had based its termination or nonrenewal on a

          purely "technical"  violation of state  law, nor  that the  fran-

          chisor's  own conduct  had coerced  Desfosses into  violating the

          PMPA.  Indeed,   2802(c)(4) does not pertain to violative acts of
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          the  franchisee, but  to  acts entirely  within the  franchisor's
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          control.  15 U.S.C.    2802(c)(4)  (providing for  termination or
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          nonrenewal upon  the "loss  of  the franchisor's  right to  grant

          possession of the leased marketing premises through expiration of

          an underlying  lease, if  . .  . the  franchisee was  notified in
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          writing,  prior to  the  commencement of  the  term of  the  then

          existing franchise . . . of the duration of the  underlying lease

          . . . .").  Desfosses simply claimed that Wallace had not provid-

          ed him with the requisite notice.  Desfosses, 836 F.2d at 26.
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          to protect "franchisees from  arbitrary and discriminatory termi-
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          nations or  non-renewals of their franchises")  (emphasis added).



          At this juncture, we conclude that K.E.M.'s alleged lapses are at



          least arguably de  minimis.   Since K.E.M. does  possess the  raw
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          gasoline  inventory data    in  written form     with which State
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          auditors could  test its daily inventory  reconciliations, we can



          discern no manifest  abuse of  discretion in  the district  court



          ruling  that  the  "technicality"  of this  asserted  ground  for



          termination presented  K.E.M. with  a colorable defense,  i.e., a



          "fair  ground for litigation."   See Shell Oil  Co., No. 95-001B,
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          slip op. at 13 (D.R.I. Feb. 16, 1995).



                    Similarly, "Congress  enacted PMPA to  avert the detri-



          mental effects  on the  nationwide  gasoline distribution  system



          caused by  the  unequal bargaining  power  enjoyed by  large  oil



          conglomerates  over  their  service-station franchisees."    Four
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          Corners Serv. Station, Inc. v. Mobil  Oil Corp., 51 F.3d 306, 310
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          (1st  Cir. 1995). See Desfosses v. Wallace Energy, Inc., 836 F.2d
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          22, 25  (1st Cir.  1987)  (noting that  PMPA  "'must be  given  a



          liberal construction  consistent with its  overriding purpose  to



          protect franchisees'") (citing  Brach v. Amoco Oil  Co., 677 F.2d
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          1213, 1221  (7th Cir. 1982)).   It also left "'to  the courts the



          task of resorting to traditional principles of equity to maximize



          attainment of  the  competing statutory  objectives  consistently



          with . . . the purposes of the [PMPA].'"  Shell Oil Co. v. K.E.M.
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          Serv., Inc., No. 95-001B, slip  op. at 11 (D.R.I. Feb. 16,  1995)
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          (quoting  S. Rep. No.  95-731).  Accordingly,  were discovery and





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          trial to disclose that Shell knowingly took inequitable advantage



          of K.E.M.'s  precarious market  position and  inferior bargaining



          position, the question  whether Congress contemplated "equitable"



          exceptions  to section 2802(c)(10)'s "willful misbranding" prohi-



          bition would be presented on a fully developed factual record.



                    Finally, equitable  relief from section  2802(10) might



          be  considered more  appropriate  were K.E.M.  to demonstrate  at



          trial that Shell had breached the Agreement first, leaving K.E.M.



          with the  Hobson's choice of  buying non-Shell gasoline  or going



          out of business. The Agreement expressly provides that Shell  has



          no contractual obligation to deliver "short loads" to K.E.M.  See
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          Agreement Art. 9.1.   On  the other hand,  Shell abruptly  ceased



          providing K.E.M with  "short loads" after  a nine-year course  of
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          dealing.   Course  of  dealing may  be  competent evidence  of  a



          subsequent modification of a  written contract.  See, e.g.,  R.I.
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          Gen. Laws    6A-1-205, 6A-2-202.  Although the Agreement contains



          a provision barring nonwritten modifications,  see Agreement Art.
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          26, the PMPA specifically  provides that franchise agreements may



          be written  or oral.  See  15 U.S.C.   2801(10),  2801(1)(A), (B)
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          (defining "franchise"  as "contract");  see also Royer  v. Royer,
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          501  A.2d  739, 741  (R.I. 1985)  ("[A]  written contract  may be



          modified by subsequent oral agreement of the parties," even where



          contract expressly requires written modification only.); J. Koury
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          Steel Erectors, Inc. v. San-Vel Concrete Corp., 387 A.2d 694, 697
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          (R.I.  1979) (describing  implied-in-fact contracts  arising from



          course of dealing).





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                    What  is  more  important,  the  PMPA's  definition  of



          "contract"  expressly  provides  that,  "[f]or  supply  purposes,



          delivery  levels during the same month of the previous year shall



          be  prima facie evidence of an agreement to deliver such levels."



          15 U.S.C.   2801(10).  If the "short load" delivery levels became



          part of  a  modified  Shell-K.E.M.  franchise  contract,  Shell's



          abrupt  change of course might  constitute a breach  of the fran-



          chise agreement.   Thus  viewed, K.E.M.'s "equitable"  defense to



          section  2802(c)(10) might  be considered  at least  "colorable,"



          since K.E.M. might make a plausible argument that Congress  could



          not have intended  to permit franchisors to  resort to conclusive



          presumptions  of  "reasonableness"  under section  2802(c)  where



          their own breach of the franchise agreement afforded the means of
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          securing a per se right of termination.
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                    Given  the prominent  equitable mandate  in the  PMPA's



          legislative  history, as  well  as the  nebulous and  undeveloped



          factual  record,  we  cannot  conclude that  the  district  court



          manifestly  abused  its  discretion  in  deciding  that  "serious



          questions going  to the  merits  [of Shell's  claim and  K.E.M.'s



          defenses  offer] . .  . fair ground  for litigation."   Nor do we



          presume  to  determine the  relative  merits,  either of  Shell's



          claims or K.E.M.'s defenses.



                    The preliminary injunction is  affirmed and the case is
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          remanded to the district court for further proceedings.
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