Dealers Draw Winning Hand

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Dealers Draw Winning Hand

By Peter H. Gunst - 05/05/2003
Many service station dealers feel — rightly or wrongly — that their oil company landlords are overcharging them for rent and gasoline in order to drive them out of business. They believe that oil companies are doing indirectly what Congress's passage of the Petroleum Marketing Practices Act (PMPA) prohibits them from doing directly: converting independent stations into company-operated units.

Two court cases in recent years suggest not only that the dealers may be right, but also that they may have a significant legal remedy. In Allapattah Services v. Exxon and Mathis v. Exxon, Exxon was found liable for using its pricing power to attempt to convert independent stations to company operation.

Their results were most recently buttressed by the February appellate court ruling in HRN Inc. v. Shell Oil, granting hundreds of dealers from 17 states the right to a full trial. The plaintiffs contend Shell's high tankwagon prices are intended to drive them out of business.

These cases represent a sea change in the law.

Earlier lawsuits charging oil companies with attempting to price dealers out of business had yielded at best mixed results. Two major obstacles presented themselves: convincing the court of the oil company's predatory intent, and finding a legal theory to attack such conduct.

Those lawsuits, which date back to the early 1980s, usually asserted claims under federal statutes — the antitrust law's prohibition of predatory pricing or the PMPA's condemnation of wrongful termination or non-renewal of dealer franchises.

Hess's rollout of new dealer agreements in 1981 caused one dealer to sue under the PMPA, complaining that Hess's rent formula was intended to drive him out of business. A federal judge concluded that Hess had great latitude to propose new contract terms, even on a "take it or leave it" basis. The dealer's evidence that he could not make a profit under the new rent structure was insufficient to establish "an improper purpose" on Hess's part.

Curiously, another federal judge reached an opposite conclusion in a case based on virtually the same evidence, and prohibited Hess from immediately imposing its new rent structure on complaining dealers. Go figure.

Other cases followed intermittently. With few exceptions, courts proved reluctant to interfere with supplier pricing discretion, or to infer an intent to drive dealers out of business.

Strategic Change

Then came Allapattah Services and Mathis. Here, dealers ignored federal statutes and instead relied on the Uniform Commercial Code (UCC), a body of contract law enacted in every state.

UCC ß2-305 governs "open price terms" in agreements where parties foresee that prices will change in unpredictable ways throughout the life of a contract. It requires suppliers to set commercially reasonable prices in "good faith," defined as "honesty in fact."

In Allapattah Services, a nationwide dealer class contended that Exxon violated its "good faith" duty for over a decade by failing to honor its promise to decrease its wholesale price to offset its 3-percent credit card fee, as part of a secret scheme to price some dealers — identified as Exxon's "non-keepers" — out of business. The jury in 1999 found Exxon liable, but lengthy damage proceedings and appeals still remain.

In Mathis, a federal appeals court last year upheld the award of $8 million to a group of Texas dealers who likewise contended that Exxon had set its wholesale prices at uncompetitive levels to drive them out of business. The court's opinion emphasized internal Exxon documents projecting a substantial reduction in dealer-operated stations and increase in company-operated stations. Such evidence supported a finding of bad faith, even though Exxon's wholesale prices were comparable to those of its competitors.

These two cases are significant for a number of reasons:

The Mathis court expressly approved some of the findings in Allapattah Services, thus strengthening the dealers' position when that huge case goes on appeal.

It is not unlikely that potential "smoking guns" will be found in the files of other oil companies concerning the replacement of independent dealers with company-operated locations.

Oil companies may be vulnerable to attack because of the complexity of the pricing programs they employ.

These cases, along with the HRN decision, suggest that oil companies may be more vulnerable than previously suspected. Dealers may have real protection against being priced into oblivion.

Peter H. Gunst is counsel for the Service Station Dealers of America. He may be reached at 410-783-3542.