Patel v. Sun Company, Inc. ( 1995 )

Opinions of the United
1995 Decisions States Court of Appeals
for the Third Circuit
8-21-1995
Patel v Sun Company, Inc.
Precedential or Non-Precedential:
Docket 94-2092
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UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
_____________________
No. 94-2092
_____________________
Prakash H. Patel and Shobha P. Patel, h/w,
Appellants,
v.
Sun Company, Inc. and Lancaster Associates.
_____________________
On Appeal from the United States District Court
for the Eastern District of Pennsylvania
(D.C. No. 94-cv-4318)
_____________________
Argued February 3, 1995
Before: SCIRICA, ROTH, and SAROKIN, Circuit Judges
(Opinion Filed August 21, 1995)
______________________
Dimitri G. Daskal, Esquire (Argued)
The Daskal Law Group
700 13th St., N.W., Suite 950
Washington, DC 20005
Edward T. Rostick, Esquire
Williams & Scheetz
935 Second Street Pike
Richboro, PA 18954
Attorneys for Appellants
James M. Brogan, Esquire (Argued)
Christopher W. Wasson, Esq.
Piper & Marbury
18th & Arch Streets
3400 Two Logan Square
1
Philadelphia, PA 19103
Attorneys for Appellee Sun Company, Inc.
John F. Fox, Jr., Esquire (Argued)
Law Offices of John F. Fox, Jr.
1420 Walnut St., Suite 1100
Philadelphia, PA 19102
Attorney for Appellee Lancaster Associates
____________________
OPINION OF THE COURT
_____________________
ROTH, Circuit Judge:
This appeal represents the latest chapter in plaintiffs' ongoing
obtain injunctive relief under the Petroleum Marketing Practices Act ("PMPA"
2801 et seq. Specifically, plaintiffs, operators of a service station, have
preliminary injunction to prevent defendants from refusing to renew plainti
and from evicting them from the franchise location, which plaintiffs have oc
1978. Plaintiffs' initial request for injunctive relief was denied on the g
event required to trigger the enforcement provisions of the PMPA, terminatio
nonrenewal of a franchise, had not yet occurred. Now that the required nonr
clearly occurred, the question presented by this appeal is whether injunctiv
still an available remedy for these plaintiffs against these defendants.
I.
Defendant Sun Company, Inc., ("Sun") is a refiner and marketer of
In 1978, plaintiffs Prakash and Shobha Patel, husband and wife, entered into
franchise relationship with Sun for the operation of a Sunoco service stati
time of this original agreement, Sun owned the real estate on which the serv
was located. This parcel also contained an office building with a parking l
2
In December 1987, Sun sold the entire parcel of land to defendant
Associates ("Lancaster").0 Lancaster leased the service station back to Sun
September 30, 1994, and granted Sun the right to sublease it. Sun then offe
sublease the service station to the Patels for a period of three years. The
agreement specifically stated that Sun's right to grant possession of the pr
be subject to an underlying lease which would expire on September 30, 1994.
agreement also clearly stated that the underlying lease "might expire or non
expiration of the initial term or any renewal option thereof."
On May 17, 1988, before the sublease agreement had been signed, th
suit in the Eastern District of Pennsylvania, alleging that Sun and Lancast
the PMPA. The Patels claimed that the PMPA entitled them to a right of firs
before the franchise location could be sold and that Sun had failed to grant
right or to offer to sell the property to them.0 Accordingly, the Patels as
they were entitled to injunctive relief and money damages under the PMPA. O
1988, the Patels signed the sublease with Sun.0
In October 1988, the district court denied the Patels' motion for
injunction, holding that the statutory precondition for injunctive relief, n
the franchise, had not yet occurred. Patel v. Sun Ref. & Mktg. Co., No. 88
at 1-2 (E.D. Pa. Oct. 14, 1988) ("Patel I"). On motion for reconsideration,
affirmed its holding but invited the Patels to recast their complaint as one
0
Lancaster is neither a refiner nor a distributor of motor fuels. Additiona
is not a subsidiary of, nor does it have any other relationship with, Sun be
purchase of the real estate here in question.
0
The parties dispute whether Sun offered to sell the service station premise
Patels before selling to Lancaster. The district court did note during the
proceedings that: "The franchisor has sold the premises without first offer
franchisees a chance to purchase." Patel v. Sun Ref. & Mktg, 710 F. Supp.
1989) ("Patel II").
0
The Patels assert that they signed this renewal, with its notice of the lea
because they had no choice. Supplemental Appendix at 132.
2
declaratory judgment. Patel v. Sun Ref. & Mktg. Co., 710 F. Supp. 1023, 102
1989) ("Patel II").
Although the Patels amended their complaint, the district court
their request for relief under the PMPA on the ground that the triggering ac
under the statute, nonrenewal of the franchise, had not yet occurred. Patel
Mktg. Co., 1992 WL 25737, at *2 (E.D. Pa. 1992) ("Patel III"). The Patels
this order.
Meanwhile, in December 1991, the Patels and Sun executed another s
extending the term to August 20, 1994. This new sublease, like its predecess
stated that Sun's right to grant possession of the premises was subject to
lease with Lancaster, which would expire on September 30, 1994.
On April 28, 1994, 120 days before the expiration of the sublease,
the Patels that their franchise and sublease would not be renewed due to th
Sun's underlying lease with Lancaster. The underlying lease between Sun and
expired on September 30, 1994.
After receiving notice from Sun that their franchise would not be
Patels in July 1994 commenced the instant action in district court, again al
the nonrenewal of their franchise was improper under the PMPA because Sun ha
the Patels a right of first refusal before the sale to Lancaster, nor had i
sell the property to the Patels. In deciding the Patels' motion for a preli
injunction, the district court found that, because Sun's sale of the premise
did not constitute a termination or nonrenewal of the franchise, the Patels'
the PMPA were not triggered at that time. Patel v. Sun Co., 866 F. Supp. 8Pa. 1994) ("Patel IV"). The court further held that Sun's loss of the right
possession of the premises due to the expiration of its underlying lease wi
was a valid reason for nonrenewal under the PMPA and that, therefore, no ser
existed regarding the merits of the Patels' PMPA claim. Id. at 873-74. Ac
3
Patels' motion for a preliminary injunction was denied. The Patels appealed
granted a stay pending appeal.
II.
The PMPA regulates the relationship between motor fuel distribut
principally oil refiners, and their franchisees, principally retail gas stat
Prior to the passage of the PMPA, evidence suggested that "distributors had
threat of termination or nonrenewal to compel franchisees to comply with the
marketing policies . . . [and] to gain an unfair advantage in contract dispu
v. Amoco Oil Co., 830 F.2d 476, 478 (3d Cir. 1987) (in banc) (citing S. Rep.
Cong., 2d Sess. 17-19, 1978 U.S.C.C.A.N. 873, 875-77) ("Senate Report").
passing the PMPA, Congress sought to "protect a franchisee's 'reasonable exp
continuing the franchise relationship while at the same time insuring that d
have 'adequate flexibility . . . to respond to changing market conditions an
preferences.'" Id. (quoting Senate Report at 19, 1978 U.S.C.C.A.N. at 877)
In order to effectuate these purposes, the PMPA prohibits distribu
terminating or nonrenewing franchises, unless the termination or nonrenewal
one of the enumerated grounds set forth in the statute. 15 U.S.C. § 2802.
enumerated exceptions involve franchisee misconduct, which is not alleged in
See, e.g., § 2802(b)(2)(C) (termination based upon franchisee's failure to p
under the franchise agreement); §2802(b)(3)(B) (nonrenewal based upon "bona
complaints" about franchisee's operations); § 2802(b)(3)(C) (nonrenewal base
franchisee's failure to operate property "in a clean, safe, and healthful ma
In addition to the exceptions for franchisee misconduct, the PMPA
authorizes nonrenewal for a limited set of business reasons, two of which ar
the instant appeal. First, a distributor may fail to renew a franchise agre
distributor decides to sell the premises "in good faith and in the normal c
business." §2802(b)(D)(i)(III). In such a case, however, the distributor m
4
have offered to sell the premises to the franchisee, § 2802(b)(D)(iii)(I), o
the franchisee a right of first refusal of the purchaser's offer, § 2802(b)
Second, a distributor may fail to renew a franchise agreement upon the "occu
event which is relevant to the franchise relationship and as a result of whi
nonrenewal of the franchise is reasonable." § 2802(b)(2)(C). One "relevant
recognized in the statute is the franchisor's loss of its "right to grant po
the leased marketing premises through expiration of an underlying lease." §
Section 2805(a) of the statute creates a civil cause of action fo
against franchisors for violations of the statute. In these civil actions,
free to exercise "such equitable relief . . . necessary to remedy the effect
violation. § 2805(b)(1). This equitable relief includes, but is not limit
preliminary injunctions. Id. Section 2805(d) also provides for an award of
exemplary damages and of attorney and expert witness fees to a franchisee wh
a civil action against a franchisor. Section 2805(e) then provides an excep
award of injunctive relief in that the court may not compel a continuation o
franchise if the franchisor has demonstrated to the court that the nonrenewa
franchise was caused by the decision of the franchisor, made in good faith
normal course of business, to convert, alter, or sell the premises or to wit
marketing fuel oil in that geographic market area.
III.
We review the district court's conclusions of law in a plenary f
findings of fact under a clearly erroneous standard, and its decision to gra
0
In 1994, Congress amended the "loss of underlying lease" exception by requi
franchisor to offer to assign to the franchisee "any option to extend the un
or option to purchase the marketing premises that is held by the franchisor.
103-371, 103d Cong., 2d Sess., 108 Stat. 3484-85. That amendment is not app
present case.
5
injunction for abuse of discretion. Johnson & Johnson-Merck Consumer Pharm
Rhone-Poulenc Rorer Pharmaceuticals, 19 F.3d 125 (3d Cir. 1994).
A.
We begin our analysis of the instant appeal with plaintiffs' reque
injunction against Lancaster. Plaintiffs' cause of action against both defe
of § 2805(a) of the PMPA which reads, in relevant part:
If a franchisor fails to comply with the requirements of section 2802
this title, the franchisee may maintain a civil action against such fr
§ 2805(a) (emphasis added). In the PMPA, "franchisor" is defined as:
a refiner or distributor . . . who authorizes or permits, under a fran
retailer or distributor to use a trademark in connection with the sale,
consignment, or distribution of motor fuel.
§ 2801(3). Thus, the application of the PMPA is limited to causes of action
between franchisees and franchisors engaged in the petroleum marketing fiel
from the facts presented in this case, however, that Lancaster is not a refi
distributor of motor fuel, and therefore falls outside the literal scope of
For this reason, the Patels cannot obtain relief against Lancaster under the
Plaintiffs maintain, however, that Lancaster, as the purchaser of
should be "charged with notice of Sun's obligations under [the] PMPA" and sh
"title subject to those obligations." Complaint, ¶24. We find this argumen
unpersuasive. Plaintiffs fail to indicate any evidence, either in the text
in its legislative history, that the PMPA was meant to apply beyond the fran
franchisor relationship. Cf. Barnes v. Gulf Oil Corp. 824 F.2d 300, 303-04
1987) (permitting individuals or small companies to qualify as "franchisors"
large refiners and distributors to terminate their relationship with a franc
assigning the remainder of the franchise term to small enterprises with limi
resources). Moreover, it would seem beyond any legal or practical ability o
license the Patels to use the Sun trademarks or to provide the Patels with p
6
products for retail sale. Therefore, because the language of the statute is
we find no reason to apply the PMPA to Lancaster.0
B.
Our analysis turns next to the Patels' request for an injunction a
The criteria that courts are to consider in determining whether to grant a p
injunction under the PMPA are set out in § 2805(b)(2) of the act, which read
part:
[T]he court shall grant a preliminary injunction if--
(A) the franchisee shows--
(i) the franchise of which he is a party has been terminated or the
relationship of which he is a party has not been renewed, and
(ii) there exist sufficiently serious questions going to the merits t
such questions a fair ground for litigation; and
(B) the court determines that, on balance, the hardships imposed upon
franchisor by the issuance of such preliminary injunctive relief will b
than the hardship which would be imposed upon such franchisee if such
preliminary injunctive relief were not granted.
§ 2805(b)(2).
In denying the Patels' motion for a preliminary injunction, the di
determined that no sufficiently serious questions regarding the merits exist
a balancing of the hardships. In reaching this conclusion, the district cou
part on the judgment that "[w]hen Sun sold the station to Lancaster it did n
or fail to renew the Patels' franchise relationship." Patel IV, 866 F. Sup
0
The dissent argues in Part V that Lancaster took title to the real property
Sun's obligations as a franchisor under the PMPA and thereby is subject to t
responsibilities with respect to the property as was Sun. For the reasons s
court in Barnes, however, we cannot agree that a petroleum refiner/distribu
able to pass on all or part of its obligations under the PMPA to a third par
not qualify as a franchisor under the PMPA.
0
This conclusion echoes the conclusion reached earlier in Patel I, Patel II,
III. In those cases, the determination that the sale of the property did no
7
Our determination to deny the Patels' motion for a preliminary inj
against Sun is not, however, based upon this conclusion. It is based on § 2
bars an injunction that would require a franchisor to continue a franchise i
which the franchisor, in good faith and in the normal course of business, ha
sell.0 In other words, if a franchisor does not want to take over a franchi
to transfer it to another dealer, but simply for business reasons wants to c
retail operations in a certain location, the PMPA will not enjoin a franchi
so provided the decision is made in good faith and in accordance with the re
§ 2804.
If the franchisor does attempt to close down the franchise locatio
meeting the requirements of § 2802, however, it may be liable in damages to
franchisee. Although § 2805(e) does not permit a permanent injunction maint
franchise under these circumstances, it does provide for the franchisee to r
damages and reasonable attorney and expert witness fees if, for instance, th
has failed to offer to sell the premises to the franchisee prior to a sale t
party.
Because the record here demonstrates that Sun did not take over th
order to operate it for its own account or to lease it to a new tenant, see
2802(b)(2)(E), we conclude that the district court could not enter a permane
requiring Sun to continue the Patel's franchise at its present location. In
termination or nonrenewal of the Patels' franchise led the court to find tha
rights under the PMPA had not yet been triggered.
Unlike the court in these earlier decisions, we are not confident
sale of the station to Lancaster did not constitute an action sufficient to
Patels' rights under the statute. It is important to note, however, that th
have appealed the decisions in Patel II and Patel III, but chose not to. A
this Court must decide the instant appeal in light of the parties' current
0
The dissent, citing the legislative history, argues that §2805(e) applies o
permanent, not to preliminary, injunctions. The language of the statute does
make that distinction.
8
provisions of § 2805(e), we find that the denial of the injunction by the d
was not erroneous.
Clearly, one cannot help but feel some sympathy for the Patels. A
their initial attempt to obtain injunctive relief, they were sent away and t
such relief when their franchise was not renewed. Now, having returned to c
occurrence of the nonrenewal, they are told that they are not eligible for i
relief. The Patels still have, however, the opportunity to present to the d
their contention that the nonrenewal of their franchise violates § 2802 beca
given for nonrenewal, the expiration of the underlying lease, was a conditio
the franchisor when it sold the property without offering the franchisee an
purchase it. Even if injunctive relief is no longer available to the Patels,
provide for awards of damages and fees to a franchisee who is successful in
against a franchisor. 15 U.S.C. § 2805(d) and (e).0
Additionally, we note that the language of the statute may have c
Patel's situation. If there is a gap in the provisions of the PMPA, it shou
corrected by Congress if Congress decides that this gap could undermine its
passing the PMPA. This decision, however, belongs with Congress and not wi
IV.
In conclusion, we will affirm the district court's denial of the P
for a preliminary injunction against Sun and Lancaster. The Patels, however
0
The dissent states that "[t]he majority holds that the franchisor
to offer to sell to the franchisee can be avoided simply by postponing the n
termination of the franchise to a time subsequent to the title closing." Di
1; see also id. at 13 ("The majority opinion, however, holding that a sale-
followed by expiration of an underlying lease makes nonrenewal reasonable, a
franchisors to completely dispense with the bona fide offer requirement.").
hold. Instead, we hold that a franchisor that fails to offer the property t
franchisee before selling to another is liable to the franchisee for damages
be enjoined from the sale, provided the transaction is made in good faith an
normal course of business, with the requisite notice.
9
the opportunity to seek damages under the PMPA. Accordingly, we will reman
to the district court for further proceedings consistent with this opinion.
10
Patel v. Sun, No. 94-2092
SAROKIN, Circuit Judge, dissenting:
I respectfully dissent because I believe that the majority opinion
franchisors to circumvent one of the most fundamental protections afforded b
franchisees under the PMPA -- namely the right to purchase the franchise pr
franchisor elects to sell. The majority holds that the franchisor's obliga
to sell to the franchisee can be avoided simply by postponing the nonrenewal
termination of the franchise to a time subsequent to the title closing.
While the statute does permit the franchisor to sell its premises
economic reasons, it grants an important corollary right to the franchisee t
investment in the premises by affording it an opportunity to purchase the pr
sale will result in the termination or nonrenewal of the franchise. At a m
unique circumstances presented here establish fair grounds for litigation an
the issuance of a preliminary injunction. Accordingly, I would reverse the
remand for entry of injunctive relief.
I.
In addition to the facts set forth in the majority opinion, the fo
significant.
11
At the time that Lancaster purchased the parcel of land from Sun i
1987, plaintiffs allege that pursuant to the purchase and sale agreement, S
Lancaster for any PMPA claims arising out of the transaction. Although plai
not supplied the court with this agreement, the parties acknowledged the exi
indemnification clause at oral argument before the district court. Suppleme
("S.A.") at 16, 148-50.
After purchase, Lancaster leased the franchise location back to Su
years, through September 30, 1994, and granted Sun the right to sublease the
According to the testimony of its general partner, it was Lancaster's expec
time of purchase that upon the expiration of the lease-back in 1994, Sun wo
underground fuel tanks, clean the soil, and "put the property back into its
condition without any oil tanks or environmental problems." S.A. at 151. T
December 1987 plaintiffs' ability to continue in business at the franchise l
due to expire no later than September 1994.
After completing the sale and taking the lease-back from Lancaster
a three-year sublease to plaintiffs. Recognizing that Sun's sale to Lancast
a threat to the continuation of their franchise, plaintiffs immediately brou
district court in May 1988, alleging that Sun and Lancaster had violated th
after filing suit did plaintiffs sign the sublease.
An "Amendment and Ratification" to the sublease stated:
UNDERLYING LEASE
Company's right to grant possession of the Premises to Dealer is s
underlying lease which contains an initial term of Six years; Nine
Seven Days (6Years, 9Months & 7Days) years, [sic] from 12/23/87 t
NO RENEWALS which lease might expire or nonrenew at the expiration
initial term or any renewal option thereof.
S.A. at 220. It was thus evident to the Patels that any opportunity they ha
the premises from Sun and thereby continue their franchise operation would b
lost upon termination of Lancaster's lease to Sun. When asked at a hearing
12
litigation whether he executed the 1988 sublease, Mr. Patel replied, "Yes, I
choice." S.A. at 132.
After the district court rejected the plaintiff's request for an i
Patel I and then again on motion for reconsideration in Patel II, plaintiffs
complaint to seek a declaratory judgment at the invitation of the court. The
repeated its conviction that "the PMPA does give to the franchisee the right
refusal in the event of the franchisor's non-renewal," but dismissed the co
nonrenewal had not yet occurred. Patel v. Sun Refining and Marketing Co.,
at *1 (E.D.Pa. 1992)("Patel III"). The district court made clear that "[i]f
occurs, plaintiffs will have the protection of the PMPA at their disposal."
Plaintiffs did not appeal.
Nonrenewal, identified by the district court in 1988, 1989, and 19
qua non of a PMPA claim for relief, has now occurred. In Spring 1994, Sun n
plaintiffs that their franchise and sublease would not be renewed because o
expiration of Sun's lease-back with Lancaster. Plaintiffs promptly commence
arguing that their PMPA claims were now ripe and, as they have maintained si
the 1987 sale between Sun and Lancaster could not extinguish or reduce their
the Act.
The district court denied plaintiffs' motion for a preliminary inj
relying on the earlier ruling that Sun's sale of the premises did not "trigg
plaintiffs' rights under the Act, but ignoring the corollary that upon nonre
rights would attach. Patel v. Sun Co., 866 F.Supp. 871, 872 (E.D.Pa. 1994)
Thus, when plaintiffs first sought injunctive relief, it was denie
grounds that notwithstanding the sale, their franchise remained in effect.
assured, however, that if and when the franchise was adversely affected, the
would be protected. But injunctive relief was likewise denied when nonrenew
occurred, on the grounds that it was not the sale but rather the expiration
13
back which resulted in the nonrenewal. In essence, the district court told
1988 that their claims were too early and in 1994 that their claims were to
II.
The PMPA regulates the relationship between motor fuel distributor
franchisees. A principal reason for Congress' passage of the PMPA was to pr
franchisees from having their businesses subject to termination at the hands
unscrupulous franchisors. As noted by the majority, evidence at Congression
the PMPA "indicated that distributors had been using the threat of terminati
nonrenewal to compel franchisees to comply with the distributor's marketing
[and] to gain an unfair advantage in contract disputes." Slatky v. Amoco Oil
476, 478 (3d Cir. 1987)(in banc)(citing S.Rep. No. 731, 95th Cong., 2d Sess.
U.S.C.C.A.N. 873, 875-77) ("Senate Report"). In response to such evidence,
passed the PMPA to prevent large petroleum companies from exploiting franchi
O'Shea v. Amoco Oil Co., 886 F.2d 584, 587-88 (3d Cir. 1989); see also Sun R
Marketing Co. v. Rago, 741 F.2d 670, 673 (3d Cir. 1984)("major thrust" of P
protect franchisees from arbitrary or unfair termination"); Barnes v. Gulf
F.2d 300, 304-05 (4th Cir. 1987)(PMPA's "principal concern" is "protection
franchisees"); Khorenian v. Union Oil Co., 761 F.2d 533, 535 (9th Cir. 1985
construed liberally to achieve legislative goal of protecting franchisees);
Mobil Oil Corp., 864 F.2d 981, 982 (2d Cir. 1989)(PMPA directed at "the Dav
Goliath aspect of the relationship between the small retailer franchisee an
petroleum company franchisor").
The statute achieves this purpose by enacting the general rule tha
distributor may terminate or fail to renew a franchise, except for enumerate
upon adequate notice. §2802(a). Most exceptions involve franchisee miscond
not an issue in this case. See §2802(b)(2)(A)&(B), (b)(3)(B)&(C). To enfor
14
rule against termination or nonrenewal, the Act establishes a private right
a franchisee whose franchise has been terminated or not renewed. This court
the Act as creating "a presumption that any termination of a franchise is un
Rago, 741 F.2d at 672.
As stated by the majority, nonrenewal of a lease by a franchisor
by the PMPA for a limited number of business decisions, two of which are at
First, a distributor may fail to renew the franchise agreement of a franchis
property from the distributor if "in good faith and in the normal course of
distributor decides to sell the premises, provided the distributor first off
property for sale to the franchisee. §2802(b)(3)(D).
Second, the PMPA permits a distributor to nonrenew the agreement u
"occurrence of an event which is relevant to the franchise relationship and
which . . . nonrenewal of the franchise is reasonable." §2802(b)(2)(C). On
event" which, by the statute's own definition renders nonrenewal reasonable,
of the franchisor's "right to grant possession of the leased marketing premi
expiration of an underlying lease." §2802(c)(4).0
III.
I begin my analysis with the Patels' request for an injunction aga
enforcement provisions of the PMPA grant the district court broad powers to
effects of a franchisor's failure to comply with the Act, including the auth
interim equitable relief. §2805(b)(1). Under the relaxed standard for a pr
injunction, an aggrieved franchisee must show (1) a franchise has been term
renewed; (2) there are sufficiently serious questions going to the merits to
0
In 1994 Congress amended the "loss of underlying lease" exception by requir
franchisor to offer to assign to the franchisee "any option to extend the un
or option to purchase the marketing premises that is held by the franchisor.
371, 103rd Cong., 2nd Sess., 108 Stat. 3484-85.
15
questions a fair ground for litigation; and (3) the balance of hardships tip
the franchisee. §2805(b)(2). The second prong establishes a lower standard
traditional requirement that a moving party demonstrate a substantial likeli
success on the merits. Rago, 741 F.2d at 672. In this case, the district
determined that plaintiffs could not satisfy the second prong and denied re
866 F.Supp. at 873.
A. Termination or nonrenewal of the franchise
Plaintiffs and Sun are indisputably franchisees and franchisor res
defined by the PMPA. §§2801(2),(3). Unlike in the previous case, the franc
non-renewed, and the first prong is satisfied.
B. Sufficiently serious questions going to the merits to m
questions a fair ground for litigation
Sun maintains that it did not violate the general prohibition on
because (1) the 1987 sale of the premises to Lancaster did not terminate or
franchise, and thus its duty to offer plaintiffs the premises under §2802(b)
arise; and (2) the expiration of its underlying lease with Lancaster in 199
"relevant event" under §2802(c)(4), necessarily making nonrenewal reasonable
§2802(b)(C). The district court agreed.
The question before us is whether the exception to the prohibition
invoked by defendants creates fair grounds for litigation, because of the se
these events.
1. The "sale" exception
A franchisor may nonrenew a franchise based on its sale of the fra
location, provided the franchisor first makes a bona fide offer to sell to t
§2802(b)(3)(D). See Slatky, supra. The parties dispute whether Sun offere
the premises before selling them to Lancaster.
However, in the previous action, the district court commented that
the premises, without first offering plaintiff-franchisees a chance to purch
16
II, 710 F.Supp. at 1023. See also Patel III, 1992 WL 25737 at *1 ("Sun . .
premises to defendant Lancaster Associates without first offering to plainti
opportunity to purchase the land"). Here, the district court stated that th
sued "based on the prior failure of Sun to offer the property to them for sa
them a right of first refusal when Sun sold the property to Lancaster in 198
866 F.Supp. at 873, but ultimately it made no explicit finding as to whether
a bona fide offer to plaintiffs before selling to Lancaster.
If Sun did make a bona fide offer, then defendants should be entit
the "sale exception" to the general prohibition on nonrenewal, provided the
of that exception are also met; if Sun made no offer, then defendants may no
1994 nonrenewal on this basis.
2. The "relevant event" exception
A franchisor may end a franchise if an event relevant to the franc
relationship occurs which makes termination or nonrenewal "reasonable." §28
This exception (which I will refer to as the "relevant event" exception) doe
on the franchisor providing the franchisee a right of first refusal. A dif
of the Act provides that one relevant event which makes nonrenewal reasonabl
the franchisor's right to grant possession" of the franchise location. §280
maintains that the 1994 nonrenewal comported with the "relevant event" exce
pursuant to §2802(c)(4) the expiration of its lease-back necessarily made no
"reasonable."
First, I reject Sun's argument that §2802(c)(4) establishes a per
Congress itself has explained that the loss of the right to grant possessio
always satisfy the reasonableness requirement of the relevant event exceptio
it is not intended that termination or non-renewal should be perm
upon the expiration of a lease which does not evidence the existen
length relationship between the parties and as a result of the exp
which no substantive change in control of the premises results.
Senate Report at 38, 1978 U.S.C.C.A.N. at 896. Thus, there can be no per s
17
Second, the circumstances described in the Senate Report do not ex
which expiration of an underlying lease fails to satisfy the "relevant event
Rather, the legislative history indicates that a court must give at least m
to the asserted "relevant event," even if that event is arguably enumerated
Thus, although plaintiffs have supplied no evidence that the transaction bet
Lancaster was anything but at arms length, this does not end our inquiry, e
good faith.
Here, we are faced with a series of "relevant events" in which (1)
franchisee entered the franchise relationship when the franchisor held title
franchise location; (2) the franchisor sold the property to a party that do
or distribute motor oil; and (3) the franchisor non-renewed the franchise wh
back expired. For the purposes of this section, moreover, I will assume ar
failed to make a bona fide offer to the Patels before the 1987 sale. Finall
testimony by Lancaster's general partner indicated that it was Sun's intenti
nonrenew the franchise in 1994.
Under these circumstances, I conclude that plaintiffs have establi
question whether Sun's loss of the right to grant possession is a relevant e
nonrenewal reasonable presents fair grounds for litigation. Several theorie
conclusion.
First, the 1987 sale-without-offer was the "but for" cause of the
expiration of the underlying lease. Because Lancaster is neither a refiner
distributor of motor fuel, the 1987 sale eroded plaintiffs' franchise rights
its business, and positioned Sun to evade the Act in a manner I believe Cong
proscribe. Even when nonrenewal does not occur at the moment of sale, the r
because the franchisee's rights are immediately diminished. See, e.g., Wagno
Distributing, No. C85-829R, slip. op., May 21, 1986 (W.D.Wash. May 22, 1986)
18
sale of premises to party not bound by PMPA, without offering property to fr
diminished franchisee's "inchoate rights").
Second, one must distinguish between franchise relationships in wh
franchisor holds an underlying lease at the outset of the relationship and
the franchisor's fee interest is unilaterally reduced to a leasehold after t
commencement of the franchise. In the first instance, the franchisee enters
relationship with knowledge that it is subject to nonrenewal or termination
expiration of the underlying lease, or any other event provided for therein.
franchisee can accept or reject the relationship fully cognizant at the outs
risks involved. Here, however, when the Patels chose to commence their rel
Sun in 1978, Sun's control of the franchise location was not subject to an u
lease which could limit the duration of the franchise.
Third, the testimony that as of December 1987 Sun planned to nonre
prevent Sun from establishing that it complied with the special notice requi
"relevant event" exception. See §2802(b)(2)(C). All exceptions require not
before nonrenewal. §§2802(b)(1), 2804. The "relevant event" exception, how
further requirement that the franchisor provide notice of nonrenewal "not m
120 days after it has "acquired actual or constructive knowledge" of the rel
§2802(b)(2)(C). If Sun had knowledge in 1987 that its lease-back would not
1994, then its notice was seven years late.
Fourth, in the previous case between plaintiffs and Sun, the distr
warned Sun that in the event of nonrenewal, plaintiffs "will have the protec
PMPA at their disposal." Patel III, 1992 WL 25737 at *2. See also Patel I
at 1024 (franchisor's sale of the franchise location "cannot justify non-re
franchise unless the franchisor did allow the franchisee to purchase").
Fifth, this conclusion comports with the legislative intent that
protect the reasonable expectations of franchisees from unscrupulous franchi
19
Slatky, 830 F.2d at 478-79. The particular scheme at issue here, while not
previously by our circuit, is precisely the sort of practice Congress sough
The 1994 PMPA amendments, which increased the protections for a franchisee w
franchisor seeks to sell a franchise location, confirms that abusive franchi
remain an important Congressional concern. See Pub.L. 103-371, 108 Stat. 3Finally, a contrary holding is akin to writing into the PMPA an en
exception to the general prohibition on nonrenewal. Such an outcome is inco
the Congressional intent that the reasonable expectations of franchisees be
while at the same time the business judgment of franchisors be respected.
F.2d at 478. The provision that a franchisor may sell in good faith so long
franchisee is offered a right of first refusal accomplishes this legislative
majority opinion, however, holding that a sale-without-offer followed by ex
underlying lease makes nonrenewal reasonable, allows franchisors to complete
with the bona fide offer requirement. The sale can take place without firs
premises to the franchisee, followed by nonrenewal after the expiration of a
no matter how brief.
I conclude that when a franchisor owns a franchise location at th
of the franchise relationship but sells it to a party that does not refine o
motor fuel, without making the franchisee a bona fide offer to sell and with
of non-renewing upon expiration of the franchisor's lease-back, then upon a
nonrenewal there are fair grounds for litigation whether or not the "relevan
exception has been satisfied. I would leave for trial final disposition of
including, if necessary, proof of the elements of the "relevant event" exce
This conclusion is not undermined by the Patels' execution of two
Sun, each of which informed the franchisees of the imminent loss of Sun's ri
possession. First, before signing the 1988 sublease, the Patels sought to p
rights by filing the first lawsuit. Second, knowing that the sale had alread
20
consummated, the Patels had absolutely no choice but to accept the terms and
proposed by Sun. Sun's cross-examination of Mr. Patel makes this point mani
Q And, sir, isn't that correct that after the sale of thi
Lancaster Associates in January of 1988, you were offered and you entered in
the premises from 1988 through 1991?
A Yes, I had no choice.
S.A. at 132.
Nor would I treat the execution of the 1988 sublease as the commen
"new" franchise relationship, one entered by the Patels with full knowledge
lose the right to grant possession of the premises in September 1994. By 19
had already spent a decade developing the good will of their business. The
franchise agreement with Sun, executed in 1978, commenced the franchise rela
Nor finally am I persuaded by Sun's reference to cases in which a
loss of an underlying lease satisfied the "relevant event exception," becaus
the franchise relationship commenced when the franchisor held a lease, not t
franchise location. See Hutchens v. Eli Roberts Oil Co., 838 F.2d 1138, 114
1988); Veracka v. Shell Oil Co., 655 F.2d 445, 446-47 (1st Cir. 1981); Atkin
USA, Inc., 672 F.Supp. 1373, 1375 (W.D.Wash. 1987). In these cases the fra
on notice at the outset of the possible loss of the underlying lease and co
reasonably expect that the franchisor's control of the property would contin
indefinitely. Isolated from the sale-without-offer, Sun's loss of the
possession may make nonrenewal reasonable, but expiration of the lease-back
should not be analyzed separately from the other relevant circumstances. Co
Sun made a bona fide offer to the Patels before selling to Lancaster, then i
the "sale" exception to the general prohibition on nonrenewal. If there was
plaintiffs have established sufficiently serious questions whether or not Su
satisfied the "relevant event" exception to make the issue fair grounds for
C. Balance of hardships
21
The district court did not reach this element. If the district c
find on remand, which I deem appropriate, that Sun did not make a bona fide
the 1987 sale, then the court should determine whether plaintiffs have satis
prong of the preliminary injunction standard, although it clearly appears e
based upon the undisputed facts. See Barnes, 824 F.2d at 306 (balance of ha
PMPA invariably tips in favor of small franchisee rather than large franchis
IV.
Sun maintains that even if plaintiffs have met the standard for is
preliminary injunction, §2805(e) bars a preliminary injunction when the basi
nonrenewal is the good faith sale of the premises. Throughout this case, Su
to characterize its nonrenewal as based on the expiration of the underlying
than the sale of the premises. If the basis for nonrenewal is indeed the exp
lease-back, then by its own terms §2805(e) does not apply.
Even if the basis for nonrenewal were the 1987 sale, the Patels c
§2805(e) applies only to permanent injunctions. The sole court of appeals t
this question held that the structure, purpose, and legislative history of t
the conclusion that §2805(e) does not apply to preliminary injunctions. Hi
Corp., 997 F.2d 641, 647 (9th Cir. 1993). I agree.
The plain language of §2805(b)(2) makes issuance of a preliminary
mandatory when the three-pronged standard is met: "the court shall grant a p
injunction if . . ." This provision is admittedly in tension with the langua
§2805(e)(1), which provides that a court "may not compel a continuation or
franchise relationship" in certain circumstances. Thus we must look beyond
the statute.
22
First, Congress's overriding purpose in enacting the PMPA was to p
franchisee's reasonable expectation of continuing the franchise relationship
F.2d at 478; Rago, 741 F.2d at 672.
Second, the structure of §2805, entitled "Enforcement Provisions,
linear, chronological development of the subsections: subsection (a) establi
cause of action; (b) provides for interim equitable relief and sets forth th
issuance of a preliminary injunction; (c) establishes the burdens of proof
provides for legal remedies, including actual and exemplary damages, fees an
(e) provides a limitation on equitable relief. See Hilo, 997 F.2d at 644-4
Third, the legislative history strongly indicates that Congress i
§2805(e) to apply only to permanent injunctions. The Senate Report repeated
characterized §2805(e) as limiting only permanent relief:
An equitable defense to permanent injunctive relief is set forth
[2805(e)]. The court is barred from issuing permanent injunctive
elements of §2805(e) are met] . . . Such a defense to permanent i
relief does not affect the right of the franchisee to recover [dam
. . . Under [§2805(e)], the court could not issue a permanent inju
the nonrenewal . . . It should be stressed, however, that the cour
permanent injunctive relief or award damages pursuant to [§2805(d
the 'good faith' or the 'normal course of business' requirement s
[§2805(e)(1)(A)] is not met.
Senate Report, 1978 U.S.C.C.A.N. at 899-900 (emphasis added).
Finally, I agree with the Ninth Circuit that as a matter of policy
for a preliminary injunction should not be made the occasion for a mini-tria
of good faith." Hilo, 997 F.2d at 646. It makes sense to reserve for trial
elements of the §2805(e) defense, including the basis for the nonrenewal, go
the part of the franchisor, and proper §2804 notice.
Thus §2805(e) does not apply to preliminary injunctions and should
of interim relief here. The provision would remain available to Sun as a de
trial, if the district court determined that the basis for nonrenewal is in
23
sale. At that time Sun would carry the burden of establishing that the elem
§2805(e) are satisfied.
V.
Lancaster contends that it is not a franchisor bound by the PMPA.
Act's definition of a "franchisor," a party must be a refiner or distributo
fuel. §2801(3). The parties have stipulated that Lancaster is not a refiner
distributor of motor fuel. S.A. at 21-22.
Plaintiffs maintain, however, that Lancaster, as purchaser from Su
with notice of Sun's obligations under PMPA and holds title subject to thos
Complaint, ¶24. The relevant obligation here is the PMPA's requirement that
relationship not be terminated or non-renewed except upon one of the Act's
grounds. §2802(a).
First, the Pennsylvania Supreme Court has long held that "it is th
purchaser of real property to make inquiry respecting the rights of the part
possession and failing to do so they are affected with constructive notice
as would have come to his knowledge in the proper discharge of that duty."
Sedelsky, 80 A.2d 853, 855 (Pa. 1951). See also Pato v. Cernuska, 493 A.2d
(Pa.Super. 1985). In addition, that Lancaster bargained for an indemnifica
against all PMPA claims in its purchase agreement with Sun suggests that Lan
least constructive notice of the Patels' statutory rights.
Second, under Pennsylvania law a purchaser takes subject to the ri
party in possession:
Any person who acquires title to real property by descent or purch
liable to the same duties and shall have the same rights, powers a
relation to the property as the person from whom title was acquire
24
68 Pa.C.S. §250.104. See, e.g., De Marco v. Philadelphia, 494 A.2d 875, 876
1985); Casner, American Law of Property §3.59 at 307-08 (1952) ("[a] transf
reversion who is a purchaser for value . . . takes subject to the lease if h
or constructive notice of it").
These principles apply to a tenant's right of first refusal, as th
Supreme Court instructed purchasers long ago:
'[A] tenant being in possession under a lease, with an agreement i
to become the purchaser, those circumstances altogether give him a
repelling the claim of a subsequent purchaser, who made no inquiry
nature of his possession.' Knowledge of an option to purchase is w
range of what such an inquiry bindingly reveals.
Atlantic Refining Co. v. Wyoming Nat'l Bank, 51 A.2d 719, 724 (Pa. 1947) (q
Eldon in Taylor v. Stibbert, 2 Ves. 437).0
That the duties imposed on Lancaster arise under a statute rather
does not affect the purchaser's obligation to discharge those duties:
An obligation that is imposed on one of the parties to a lease . .
imposed by operation of law. The location of the burden and benef
obligation after a transfer of an interest in the leased property
what is appropriate to further the purposes of imposing the obliga
Restatement (Second) of Property §16.3(2) (1977). Congress and this court h
the "purposes of imposing" the PMPA's obligations: protecting the reasonable
of franchisees while allowing franchisors to exercise their business judgmen
830 F.2d at 478.
Consequently, like any other purchaser of land in Pennsylvania, La
had a duty to inquire into the rights of the party in possession of the pre
charged with constructive and actual notice of those rights; and (3) took su
rights, whether those rights arose by express or implied promise or by opera
Put differently, Lancaster is in privity of estate with the Patels and took
0
Interestingly, in Atlantic Refining the Pennsylvania Supreme Court also hel
tenant who occupies a portion of a larger parcel and possesses a right of fi
to the "demised premises" may exercise his right to purchase only the demise
The tenant's right does not entitle it to purchase the entire parcel. Atlan
51 A.2d at 722-23.
25
those obligations previously held by Sun which touch and concern the propert
suggestion that Lancaster is required to perform any functions as a franchis
petroleum products.
This conclusion is not inconsistent with Congressional intent. "
legislative history of the PMPA indicates that in an extraordinary situation
of premises used in a franchise operation may owe certain duties to the fran
though the landlord is not a franchisor." Bsales v. Texaco, Inc., 516 F.Su
(D.N.J. 1981).
Lancaster thus has purchased the property subject to Sun's duty no
or nonrenew the Patels' franchise, except upon various enumerated grounds.
failing to extend the lease-back with Sun or offering a lease or sale direc
Patels, however, Lancaster has caused the nonrenewal of the franchise. Lanc
not invoke the "relevant event" exception raised by Sun, as Lancaster retain
grant possession to the premises. Nor could Lancaster rely on the "sale" ex
it can demonstrate that Sun made a bona fide offer to the Patels or Lancaste
a bona fide offer, then or now.
Such a resolution of plaintiffs' motion for preliminary injunctio
with the Pennsylvania law of property as well as the PMPA's broad goals. Du
pendency of the litigation, Sun's sale of the property would be undisturbed;
would continue in business at the franchise location or purchase the proper
and ultimately, Lancaster would either retain or receive fair market value f
property.
This holding would not prevent Lancaster from raising any statutor
defense at trial. Lancaster would also be free to argue that it changed pos
0
Even if Lancaster was not directly subject to the PMPA, it would nonetheles
to the court's inherent equitable powers. I would deem it appropriate to ex
court's equitable jurisdiction over Lancaster under the extraordinary circum
herein.
26
detriment if it reasonably relied on the rulings in the previous action. As
noted, however, Lancaster purchased ten months before the first ruling in th
action, and if it made any changes or improvements to the property, it did
of the warnings in Patel II and III that upon nonrenewal the Patels could v
PMPA rights.
Conclusion
The PMPA permits a franchisor who owns a franchise location to sel
business reasons; the Act also protects the franchisee by affording it a cor
of first refusal, if the franchisor seeks to nonrenew the franchise based on
Thus the franchisor may sell, but the franchisee may continue at the locatio
notwithstanding the sale if the franchisee elects to purchase. If the fran
purchase, its franchise is subject to termination or non-renewal.
The franchisor is also permitted to end a franchise relationship w
event makes nonrenewal reasonable. Yet Congress intended that a franchisee'
expectations be protected, and we must interpret the PMPA in light of this l
purpose. Hence, when a franchisor holds title to the franchise location at
commencement of the franchise relationship, sells the premises to a party wh
refiner or distributor of motor fuel without offering it to the franchisee w
intention of later non-renewing the franchise, then there are fair grounds
whether or not such events satisfy the "reasonableness" standard of the rele
exception.
As the district court concluded in the previous litigation, howeve
language of the Act does indicate that a franchisee may not be able to vindi
rights until actual termination or nonrenewal has occurred. See §§2805(b)(
Thus, even if a franchisee learns the franchisor is attempting to sell or ha
27
franchise location without offering it to the franchisee, the franchisee may
entitled to judicial relief until actual termination or nonrenewal takes pla
time for such relief has now arrived.
As a purchaser Lancaster is subject to the same obligations in res
property only as the seller Sun. Lancaster was under a duty of inquiry, is c
constructive and actual notice of the rights of the parties in possession, a
subject to the contractual and statutory rights of those parties. The major
however, allows a franchisor to extinguish a franchisee's rights by selling
renewing later. This outcome protects the franchisor's right to sell, but d
franchisee's right to continue in business at the franchise location.
A franchisor should not be able to avoid the prohibition on nonren
establishing a sale in good faith and postponing the termination or non-rene
date beyond the closing. A purchaser who participates in such a transaction
to the rights of the franchisee. The PMPA was designed to protect franchis
invested time and money in developing a business at a specific location. A
should not be permitted to circumvent the statute and its policies by volunt
unilaterally altering the franchise relationship and subjecting the franchi
earlier termination or nonrenewal on grounds for which the franchisor did no
the franchisee did not anticipate, and which deprive the franchisee of the v
which the statute was intended to provide.
For the foregoing reasons I would reverse the order of the distric
remand with the direction that if the district court were to find that neith
Lancaster made a bona fide offer to the Patels and the balance of hardships
of plaintiffs, then a preliminary injunction be entered consistent with this
such terms and conditions as the district court would deem appropriate. How
event of such findings, such order should preliminarily enjoin defendants fr
terminating or non-renewing plaintiffs' lease and franchise on the grounds
28
underlying lease between Sun and Lancaster expired in 1994; or (2) terminati
renewing plaintiffs' lease and franchise on the grounds that the property wa
1987.
29